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THE 


Modern  Distributive  Process. 


STUDIES    OF    COMPETITION    AND    ITS    LIMITS,    OF    THE 

NATURE    AND    AMOUNT    OF    PROFITS,    AND    OF 

THE  DETERMINATION  OF  WAGES,  IN   THE 

INDUSTRIAL   SOCIETY   OF   TO-DAY 


BY 

JOHN   B.    CLARK, 

AUTHOR   OF  THE   "  PHILOSOPHY    OF   WEALTH,' 


FRANKLIN    H.    GIDDINGS. 


BOSTON : 

PUBLISHED   BY   GINN   &   COMPANY. 
I8S8. 


Copyright,  i8S8, 
By  JOHN  B.  CLARK 

AND 

FRANKLIN  H.  GIDDINGS. 


TVPOCRAPHV    DY   J.  S.  CuSHING  &  Co.,  PrESSWORK    HV   GiNN    &   CoMPANV, 

Boston.  Boston. 


PREFACE. 


A  SYSTEMATIC  restatement  of  the  facts  and  laws  of  the  Distribution 
of  Wealth  is  not  attempted  in  these  studies.  Nothing  is  said  in  them, 
except  incidentally,  of  interest  and  rent.  They  are  studies  of  the 
process  by  which  the  income  of  modern  society  is  divided  among  its 
principal  claimants.  There  is  presented  to  the  student  of  to-day  a  more 
highly  organized  industrial  system,  and  a  more  complicated  process  of 
apportioning  the  social  income,  than  those  that  were  observed  by  Adam 
Smith,  David  Ricardo,  and  John  Stuart  Mill.  By  the  operations  of 
trade  the  total  product  of  industry  is  divided  and  subdivided  among 
certain  naturally  constituted  groups  and  sub-groups.  The  income  fall- 
ing to  each  sub-group  is  apportioned  among  its  component  economic 
classes,  capitalists,  laborers,  etc.,  by  the  bargains  that  they  make  with 
each  other.  In  each  of  these  dividing  acts,  artificial  combinations,  —  the 
pools,  trusts,  labor  unions,  etc.,  of  recent  times,  —  have  come  to  play  a 
part  so  prominent  that  competition  would  seem,  at  the  first  view,  to  be 
abolished  at  important  points.  The  mode  of  its  working  has  been,  in 
fact,  so  changed  as  to  demand  a  new  scientific  treatment. 

It  is  the  aim  of  these  studies  to  analyze  the  natural  group  system  of 
modern  industry ;  to  determine  where  within  it  competition  is  possible, 
and  where  combination  is  naturally  invited ;  to  ascertain  the  extent  to 
which  this  movement  checks  individual  rivalry ;  and  to  determine  the 
nature  and  scope  of  that  residual  competition  which  is  the  controlling 
principle  of  the  new  regime.  They  thus  undertake  to  separate  that 
which  is  transient  from  that  which  is  permanent  in  the  Ricardian  Theory 
of  Distribution. 

They  analyze  into  its  elements  the  sum  traditionally  termed  profits, 
and  show  that  an  essential  element,  the  only  part  of  the  gross  sum  to 
which  the  term  pure  profit  can  be  applied,  has  not  been  clearly  distin- 
guished by  the  traditional  analysis,  and  that,  as  a  matter  of  course,  the 
special  laws  that  determine  its  amount  have  not  been  established. 
They  show  that  the  tendency  of  modern  competition  is  to  sweep  this 


iv  PREFACE. 

pure  profit  out  of  existence,  while  tliat  of  otlier  forces  is  to  cause  it  con- 
tinually to  reappear.  The  view  of  social  evolution  which  these  conclu- 
sions afford  is  that  of  a  progress  toward  equity  between  men  promoted 
by  combinations,  but  guaranteed  by  the  deeper  and  more  general  in- 
fluence of  competition  itself.  Injustice  is  diminishing,  and  that  by 
natural  law.  These  studies,  however,  take  especially  into  accouM  the 
ethical  consciousness  of  society,  which  not  only  sets  up  an  ideal  toward 
which  society  should  tend,  but,  by  public  opinion,  by  legislation,  and  in 
many  subtle  but  effective  ways  promotes  the  natural  movement  in  that 
direction. 

The  complementary  character  of  these  essays  by  two  writers  is  not  a 
premeditated  result  of  joint  authorship.  The  joint  authorship  was 
agreed  upon,  because  it  was  discovered  that,  working  independently,  the 
writers  had  arrived  at  complementary  conclusions.  The  essays  were 
originally  published  in  the  Political  Science  Quarterly,  and  are  now  re- 
published by  the  kind  permission  of  the  editors  of  that  review. 


TABLE    OF    CONTENTS. 

CHAPTER  I. 

The  Limits  of  Competition. 

By  J.  B.  Clark. 

Current  economic  theories  deducible  from  the  assumption  of  unlimited  compe- 
tition. Ricardo's  system  originally  based  on  actual  changes  in  industry; 
the  conditions  of  his  time  transitional.  The  contest  between  weak  competi- 
tors and  strong  ones,  in  certain  industries,  now  decided;  the  strong  only 
surviving,  and  these  forming  confederacies  for  the  purpose  of  checking 
competition.  Labor  doing  the  same.  Predatory  competition  vaguely  con- 
ceived; Professor  Cairnes'  effort  to  obtain  a  systematic  theory  of  it.  His 
conception  of  cost  of  production,  and  his  theory  of  non-competing  groups. 
These  groups  now  practically  merged.  Machinery  the  chief  leveller.  Sur- 
viving groups  based  on  intellectual  and  moral  differences  among  workmen. 
Entrepreneur's  labor  more  permanently  separated  from  other  labor.  Lev- 
elling tendencies  specially  active  in  America;  these  tendencies  resisted  by 
trades  unions;  the  resistance  in  the  end  unavailing.  Competition  more 
effectively  resisted  by  producers'  unions.  Pools  as  based  on  a  normal 
principle,  to  be  regulated,  l)ut  not  suppressed.  A  typical  producing  group, 
consisting  of  sub-groups  or  strata,  each  containing  capitalists  and  laborers. 
True  competition  confined  by  nature  within  the  horizontal  lines  that  sepa- 
rate strata.  Radical  difference  between  this  grouping  and  that  of  Professor 
Cairnes.  Abnormal  competition  the  cause  of  combinations.  Control  of 
prices  their  aim;  the  restricting  of  production  the  means  employed.  Resid- 
ual competition  still  an  efficient  regulator  of  prices.  Combinations  limited 
to  natural  groups;  fewness  of  competitors  a  cause  of  union;  comparative 
equality  among  them  a  necessary  condition.  Pools  impossil)le  in  agricul- 
ture. The  effect  of  cheap  transportation.  Protective  tariffs  aids  to  national 
combinations,  and  barriers  against  international  ones.  Legal  regulation  of 
pools  desirable;  the  complete  suppression  of  them  neither  desirable  nor 
possible. 


VI  TABLE  OF  CONTENTS. 

CHAPTER  II. 
The  Persistence  of  Competition. 

By  F.  H.  GiDDiNGS. 

The  principle  of  competition  fundamental  in  English  Political  Economy. 
Studies  and  predictions  of  Mr.  Bagehot.  The  theory  of  Professor  Cairnes. 
Recent  revival  of  non-competitive  methods.  Suppression  of  competi- 
tion predicted.  Combinations  play  an  increasingly  important  part,  but 
competition  not  destroyed.  In  some  form  a  permanent  economic  process. 
The  combination  equilibrium  unstable.  History  of  combinations.  Fall 
of  prices.  The  nail  combinations.  Trunk  line  railroad  allotments. 
Coal  combinations.  The  wall  paper  pool.  Conditions  determining  the 
area  within  which  combinations  can  govern  market  competition.  The 
industrial  structure  of  society.  Two  kinds  of  non-competing  groups. 
Any  one  combination  usually  confined  within  a  single  group.  The  groups 
unlike  in  composition  and  unequal  in  condition.  Combination  difficult 
in  some,  easy  in  others.  When  combination  restrictions  are  beneficial. 
What  becomes  of  the  competitive  forces.  Development  of  new  utilities. 
Steel  substitutes  for  iron.  Production  of  Bessemer  steel.  The  higher 
forms  of  competition.  Combinations  cannot  keep  production  below  the 
full  supply  of  society's  needs.  Nor  prices  above  the  level  that  yields  aver- 
age returns  to  labor  and  capital.  The  competitive  forces.  Efficiency 
of  combinations  varies  with  industrial  prosperity.  Combination  Policy. 
Essential  principles  of  Ricardian  Economics  re-affirmed. 

CHAPTER   III. 
Profits  under  Modern  Conditions. 

By  J.  B.  Clark. 

Danger  to  society  from  vague  ideas  concerning  business  profits.  Entrepreneur's 
returns  not  scientifically  analyzed.  These  returns  the  result  of  two  unlike 
functions;  an  employer,  first,  a  directive  laborer,  and  secondly,  a  merchant. 
A  manufacturer,  a  purchaser  of  raw  materials,  and  of  certain  shares  of  the 
utilities  created  in  the  manufactory.  The  workmen's  share  paid  for  in 
wages,  and  the  capitalist's  in  interest.  Pure  profit  the  difference  between 
the  total  amount  paid  for  the  elements  of  the  product,  and  the  amount 
received  for  the  product.  Labor  and  capital  involved  in  the  mercantile  part 
of  the  business;   payment  for  them  included  in  wages  and  interest.     The 


TABLE  OF  CONTENTS.  vil 

mere  acquiring  and  surrendering  of  ownership  the  essence  of  the  entre- 
preneur's function.  The  above  analysis  not  vitiated  by  the  uniting  of  sev- 
eral functions  in  one  person.  The  elements  in  the  cost  of  a  product  not 
controlled  by  the  employer;  the  selling  price  of  it  not  controlled  by  him. 
Pure  profit  determined  by  general  and  irresistible  forces.  This  sum  capable 
of  being  reduced  by  bad  management,  but  not  of  being  increased  beyond  a 
certain  point  by  good  management.  Competition,  a  cause  of  high  and  com- 
paratively uniform  managing  ability  in  rival  establishments.  The  division 
of  the  labor  of  management  conducive  to  this  result.  Contrasts  between 
the  law  of  Rent  and  that  of  Profits;  the  area  of  cultivation  extending;  the 
range  of  managing  ability  narrowing.  Tendency  of  wages  of  management 
toward  uniformity.  Tendency  of  the  law  of  increasing  returns  in  general 
business  to  produce  a  normal  and  permanent  over-production.  The  pres- 
ence of  experimenters  in  the  business  field  a  disturbing  influence.  The 
natural  check  upon  too  high  wages  of  management.  Pure  mercantile  profit 
the  only  conceivable  sum  from  which  great  additions  to  general  wages  can 
come.  This  profit  in  reality  a  vanishing  sum,  having,  in  a  competitive  sys- 
tem, only  a  local  and  temporary  existence.  The  effect  of  alternations  from 
business  activity  to  depression,  and  that  of  the  opening  of  a  continent  to 
settlement.  The  eR"ect  of  invention;  the  profit  gained  by  this  means  a  guar- 
anty for  civilization.  The  entire  gain  from  invention  transferred,  in  the  end, 
to  society.  The  testimony  of  statistics  to  the  general  truth  of  the  foregoing 
principles.  The  tendency  of  industrial  development  to  connect  personal 
rewards  with  services  rendered  to  society. 


CHAPTER   IV. 
The  Natural  Rate  of  Wages. 

By  F.  H.  GiDDiNGs. 

Two  sets  of  forces  operating  with  reference  to  the  rate  of  wages.  Automatic 
forces  of  competition.  Self-conscious  forms  of  human  feeling  and  opin- 
ion. Three  different  views  among  economists.  The  true  wages  problem. 
Standards  of  just  wages.  Communistic  and  individualistic  ideals.  No 
absolute  contradiction.  The  natural  value  of  work.  The  rule  of  ideal 
distribution.  The  English  doctrine  of  the  natural  rate  of  wages.  Adam 
Smith's  definition.  Ricardo's  theorem.  John  Stuart  Mill's  criticism.  The 
soul  of  truth  in  the  Ricardian  idea.  The  natural  rate  of  wages  is  the  rate 
that  calls  out  the  laborer's  potential  efficiency.  The  economical  rate  is 
also  the  ethical  rate.  The  actual  rate  of  wages.  The  wages  fund  doctrine. 
Cobden's  formula.    Competition  of  employers  raises  wages  notwithstanding 


viii  TABLE  OF  CONTENTS. 

the  economy  of  consolidations.  Analogy  of  rent.  Improving  industry 
multiplies  employers  or  compels  the  original  number  to  divide  their  gains 
with  the  laborers.  The  actual  rate  of  wages  tends  to  conform  to  the  nat- 
ural or  ethical  rate.  Exceptions  to  the  rule.  The  competitive  process 
inherently  defective.  Exploitation  of  wages.  No  automatic  correction 
that  meets  the  case.  True  significance  of  the  ratio  of  capital  to  population. 
Where  altruism  fails.  Associated  self-defence  of  labor  necessary.  What 
labor  organizations  and  legislation  can  accomplish.  The  sums  that  can  be 
added  to  wages.  Economic  analysis  of  the  strike.  Principles  governing 
the  coherence  of  labor  organizations.  Mi-.take  of  the  Knights  of  Labor. 
Arbitration  and  legislation  subject  to  the  same  principles.  The  rate  of 
wages  made  mainly  by  competitive  forces.  Moral  forces  acting  through 
organization  and  public  opinion  correct  distributive  errors  due  to  defects  in 
the  competitive  process.  Carried  farther,  legislation  and  demands  of  organi- 
zations but  retard  progress. 


THE   LIMITS   OF   COMPETITION. 

THERE  is  a  sense  in  which  much  of  the  orthodox  system  of 
political  economy  is  eternally  true.  Conclusions  reached 
by  valid  reasoning  are  always  as  true  as  the  hypotheses  from 
which  they  are  deduced.  If  we  admit  the  fact  of  unlimited 
competition,  we  concede  in  advance  many  doctrines  which  cur- 
rent opinion  is  now  disposed  to  reject.  This  refuge  will  always 
be  open  to  the  latter-day  defenders  of  the  faith,  as  they  are 
confronted  by  greater  and  greater  discrepancies  between  their 
system  and  the  facts  of  life  ;  it  will  remain  forever  true  that  if 
unlimited  competition  existed,  most  of  the  traditional  laws 
would  be  realized  in  the  practical  world.  It  will  also  be  true 
that  in  those  corners  of  the  industrial  field  which  still  show  an 
approximation  to  Ricardian  competition  there  will  be  seen  as 
much  of  correspondence  between  theory  and  fact  as  candid 
reasoners  claim.  If  political  economy  will  but  content  itself 
with  this  kind  of  truth,  it  need  never  be  disturbed  by  industrial 
revolutions.     The  science  need  not  trouble  itself  to  progress. 

This  hypothetical  truth,  or  science  of  what  would  take  place 
if  society  were  fashioned  after  an  ideal  pattern,  is  not  what 
Ricardo  believed  that  he  had  discovered.  His  system  was  posi- 
tive ;  actual  life  suggested  it  by  developing  tendencies  for  which 
the  scientific  formulas  which  at  that  time  were  traditional  could 
not  account.  It  was  a  new  industrial  world  which  called  for  a 
modernized  system  of  economic  doctrine.  Ricardo  was  the  first 
to  understand  the  situation,  to  trace  the  new  tendencies  to  their 
consummation,  and  to  create  a  scientific  system  by  insight  and 
foresight.  He  outran  history  in  the  process,  and  mentally 
created  a  world  more  relentlessly  competitive  than  any  which 
has  existed  ;  and  yet  it  was  fact  and  not  imagination  that  lay  at 
the  basis  of  the  whole  system.  Steam  had  been  utilized,  ma- 
chines were  supplanting  hand  labor,  workmen  were  migrating 
to  new  centres  of  production,  guild  regulations  were  giving  way, 


2  POLITICAL  SCIENCE  QUARTERLY. 

and  competition  of  a  type  unheard  of  before  was  beginning  to 
prevail. 

A  struggle  for  existence  had  commenced  between  parties  of 
unequal  strength.  In  manufacturing  industries  the  balance  of 
power  had  been  disturbed  by  steam,  and  the  little  shops  of  for- 
mer times  were  disappearing.  The  science  adapted  to  such 
conditions  was  an  economic  Darwinism ;  it  embodied  the  laws 
of  a  struggle  for  existence  between  competitors  of  the  new  and 
predatory  type  and  those  of  the  peaceable  type  which  formerly 
possessed  the  field.  Though  the  process  was  savage,  the  out- 
look which  it  afforded  was  not  wholly  evil.  The  survival  of 
crude  strength  was,  in  the  long  run,  desirable.  Machines  and 
factories  meant,  to  every  social  class,  cheapened  goods  and  more 
comfortable  living.  Efficient  working  establishments  were  de- 
veloping ;  the  social  organism  was  perfecting  itself  for  its  con- 
test with  crude  nature.  It  was  a  fuller  and  speedier  dominion 
over  the  earth  which  was  to  result  from  the  concentration  of 
human  energy  now  termed  centralization. 

The  error  unavoidable  to  the  theorists  of  the  time  lay  in 
basing  a  scientific  system  on  the  facts  afforded  by  a  state  of 
revolution.  This  was  attempting  to  derive  permanent  princi- 
ples from  transient  phenomena.  Some  of  these  principles  must 
become  obsolete ;  and  the  work  demanded  of  modern  econo- 
mists consists  in  separating  the  transient  from  the  permanent 
in  the  Ricardian  system.  How  much  of  the  doctrine  holds  true 
when  the  struggle  between  unequal  competitors  is  over,  and 
when  a  few  of  the  very  strongest  have  possession  of  the  field  } 
Can  the  old-time  competition  be  trusted  to  divide  the  fruits  of 
industry  between  one  overgrown  shop  and  another,  and  between 
the  owners  and  the  workmen  in  each }  Can  this  same  force 
control  railroads,  as  it  once  controlled  stage-coaches  and  packet- 
sloops  }  To  be  more  accurate,  are  the  transactions  of  consoli- 
dated railroad  lines  governed  by  the  same  principles  as  those 
of  single  railroads  and  stage-coach  lines  when  these  are  com- 
peting with  each  other }  Docs  the  old  regulating  principle 
at  present  exist,  and  will  general  well-being  continue  to  evolve 
itself   under   its    unaided    influence  ,-'      An    economic    system 


THE  LIMITS  OF  COMPETITION".  3 

adapted  to  the  modern  era  must  begin  by  answering  these 
questions. 

In  most  branches  of  manufacturing,  and  in  other  than  local 
transportation,  the  contest  between  the  strong  and  the  weak  is 
either  settled  or  in  process  of  rapid  settlement.  The  survivors 
are  becoming  so  few,  so  powerful,  and  so  nearly  equal  that  if  the 
strife  were  to  continue,  it  would  bid  fair  to  involve  them  all  in 
a  common  ruin.  What  has  actually  developed  is  not  such  a 
battle  of  giants,  but  a  system  of  armed  neutralities  and  federa- 
tions of  giants.  The  new  era  is  distinctively  one  of  consolida- 
ted forces  ;  rival  establishments  are  forming  combinations,  and 
the  principle  of  union  is  extending  itself  to  the  labor  and  the 
capital  in  each  of  them.  Laborers,  who  once  competed  w-ith 
each  other,  are  now  making  their  bargains  collectively  wdth 
their  employers.  Employers,  who  under  the  old  r(fgiine  would 
have  worked  independently,  are  merging  their  capital  in  cor- 
porations, and  allowing  it  to  be  managed  as  by  a  single  hand. 
We  need  Ricardo's  insight  and  foresight  if  we  are  to  attain  the 
economic  laws  that  are  to  govern  the  transactions  of  the  prac- 
tical world.  The  changes  which  w'e  are  witnessing  are  as  start- 
ling in  character  as  those  which  he  witnessed,  and  are  on  a 
scale  of  greater  magnitude.  There  is  this  difference  between 
his  scientific  position  and  ours,  namely,  that  he  saw  before 
him  an  interval  of  contest  that  must  of  necessity,  sooner  or 
later,  come  to  an  end  ;  while  we  see  approaching  a  period 
of  union  which  gives  a  promise  of  indefinite  continuance.  He 
studied  the  evolution  that  created  a  type  of  industrial  estab- 
lishment ;  we  have  to  study  the  functions  of  this  surviving 
type.  History  will  aid  us  by  furnishing  a  point  of  departure, 
and  by  indicating  the  direction  of  social  development,  but  not 
by  giving  facts  from  which  any  possible  induction  can  give  the 
principles  which  we  seek.  The  light  derivable  from  past  facts 
is  negative  ;  that  derivable  from  present  tendencies  is  positive. 
The  materials  for  study  lie  in  the  present  and  the  immediate 
future ;  and,  to  be  scientific,  we  must  be  somewhat  prophetic. 

Predatory  competition  between  unequal  parties  was  the  basis 
of  the  Ricardian  system.     This  process  was  vaguely  conceived 


4  POLITICAL  SCIENCE  QUARTERLY. 

and  never  fully  analyzed ;  what  was  prominent  in  the  thought 
of  men  in  connection  with  it  was  the  single  element  of  stru2;s:le. 
Mere  effort  to  survive,  the  Darwinian  feature  of  the  process, 
was  all  that,  in  some  uses,  the  term  competition  was  made  to 
designate.  Yet  the  competitive  action  of  an  organized  society 
is  systematic ;  each  part  of  it  is  limited  to  a  specific  field,  and 
tends,  within  these  limits,  to  self-annihilation. 

An  effort  to  attain  a  conception  of  competition  that  should 
remove  some  of  the  confusion  was  made  by  Professor  Cairnes. 
His  system  of  "non-competing  groups"  is  a  feature  of  his  value 
theory,  which  is  a  noteworthy  contribution  to  economic  thought. 
Mr.  Mill  had  followed  Ricardo  in  teaching  that  the  natural  price 
of  commodities  is  governed  by  the  cost  of  producing  them. 
Professor  Cairnes  accepts  this  statement,  but  attaches  to  it  a 
meaning  altogether  new.     He  says,  in  effect : 

Commodities  do  indeed  exchange  according  to  their  cost  of  produc- 
tion ;  but  cost  is  something  quite  different  from  what  currently  passes 
by  that  name.  That  is  merely  the  outlay  incurred  by  the  capitalist- 
employer,  for  raw  materials,  labor,  etc.  The  real  cost  is  the  personal 
sacrifice  made  by  the  producing  parties,  workmen  as  well  as  employers. 
It  is  not  a  mercantile  but  a  psychological  phenomenon,  a  reaction  upon 
the  men  themselves  occasioned  by  the  effort  of  the  laborer  and  the 
abstinence  of  the  capitalist.  These  personal  sacrifices  gauge  the  market 
value  of  commodities  within  the  fields  in  which,  in  the  terms  of  the 
theory,  competition  is  free.  The  adjustment  takes  place  through  the 
spontaneous  movement  of  capital  and  labor  from  employments  that  yield 
small  returns  to  those  that  give  larger  ones.  Capital  migrates  freely 
from  place  to  place  and  from  occupation  to  occupation.  If  one  indus- 
try is  abnormally  profitable,  capital  seeks  it,  increases  and  cheapens  its 
product,  and  reduces  its  profits  to  the  prevailing  level.  Profits  tend  to 
a  general  uniformity. 

Wages  are  said  to  tend  to  equality  only  within  limits.  The 
transfer  of  labor  from  one  employment  to  another  is  checked 
by  barriers. 

What  we  find,  in  effect  [continues  Professor  Cairnes],  is  not  a  whole 
population  competing  indiscriminately  for  all  occupations,  but  a  series  of 
industrial  layers,  superimposed  on  one  another,  within  each  of  which  the 
various  candidates  for  employment  possess  a  real  and  effective  power  of 


THE  LIMITS  OF  COMPETITION:  5 

selection,  while  those  occupying  the  several  strata  are,  for  all  purposes  of 
effective  competition,  practically  isolated  from  each  other.  We  may 
perhaps  venture  to  arrange  them  in  some  such  order  as  this  :  first,  at  the 
bottom  of  the  scale  there  would  be  the  large  group  of  unskilled  or  nearly 
unskilled  laborers,  comprising  agricultural  laborers,  laborers  engaged  in 
miscellaneous  occupations  in  towns,  or  acting  in  attendance  on  skilled 
labor.  Secondly,  there  would  be  the  artisan  group,  comprising  skilled 
laborers  of  the  secondary  order,  —  carpenters,  joiners,  smiths,  masons, 
shoemakers,  tailors,  hatters,  etc.,  etc.,  —  with  whom  might  be  included  the 
very  large  class  of  small  retail  dealers,  whose  means  and  position  place 
them  within  the  reach  of  the  same  industrial  opportunities  as  the  class 
of  artisans.  The  third  layer  would  contain  producers  and  dealers  of  a 
higher  order,  whose  work  would  demand  qualifications  only  obtainable 
by  persons  of  substantial  means  and  fair  educational  opportunities  ;  for 
example,  civil  and  mechanical  engineers,  chemists,  opticians,  watch- 
makers, and  others  of  the  same  industrial  grade,  in  which  might  also  find 
a  place  the  superior  class  of  retail  tradesmen ;  while  above  these  there 
would  be  a  fourth,  comprising  persons  still  more  favorably  circumstanced, 
whose  ampler  means  would  give  them  a  still  wider  choice.  This  last 
group  would  contain  members  of  the  learned  professions,  as  well  as  per- 
sons engaged  in  the  various  careers  of  science  and  art,  and  in  the  higher 
branches  of  mercantile  business. 

It  is  essential  to  the  theory  that  not  only  workmen  but  their 
children  should  be  confined  to  a  producing  group.  The  equal- 
izing process  may  take  place  even  though  men  do  not  actually 
abandon  one  occupation  and  enter  another ;  for  there  exists,  in 
the  generation  of  young  men  not  yet  committed  to  any  occupa- 
tion, a  disposable  fund  of  labor,  which  will  gravitate  naturally 
to  the  occupations  that  pay  the  largest  wages.  It  is  not  neces- 
sary that  blacksmiths  should  ever  become  shoemakers,  or  vice 
versa,  but  only  that  the  children  of  both  classes  of  artisans 
should  be  free  to  enter  the  trade  that  is  best  rewarded. 

Professor  Cairnes  does  not  claim  that  his  classification  is 
exhaustive,  nor  that  the  demarcation  is  absolute  : 

No  doubt  the  various  ranks  and  classes  fade  into  each  other  by  imper- 
ceptible gradations,  and  individuals  from  all  classes  are  constantly  pass- 
ing up  or  dropping  down ;  but  while  this  is  so,  it  is  nevertheless  true 
that  the  average  workman,  from  whatever  rank  he  be  taken,  finds  his 
power  of  competition  limited  for  practical  purposes  to  a  certain  range  of 


6  POLITICAL  SCIENCE  QUARTERLY. 

occupations,  so  that,  however  high  the  rates  of  remuneration  in  those 
which  Ue  beyond  may  rise,  he  is  excluded  from  sharing  them.  We  are 
thus  compelled  to  recognize  the  existence  of  non-competing  industrial 
groups  as  a  feature  of  our  social  economy. 

It  will  be  seen  that  the  competition  which  is  here  under  dis- 
cussion is  of  an  extraordinary  kind ;  and  the  fact  that  the  gen- 
eral term  is  applied  to  it  without  explanation  is  a  proof  of  the 
vagueness  of  the  conceptions  of  competition  with  which  acute 
writers  have  contented  themselves.  Actual  competition  con- 
sists invariably  in  an  effort  to  undersell  a  rival  producer.  A 
carpenter  competes  with  a  carpenter  because  he  creates  a  simi- 
lar utility,  and  offers  it  in  the  market.  In  the  theory  of  Pro- 
fessor Cairnes  the  carpenter  is  the  competitor  of  the  blacksmith, 
because  his  children  may  enter  the  blacksmith's  calling.  In 
the  actual  practice  of  his  own  trade,  the  one  artisan  in  nowise 
affects  the  other.  It  is  potential  competition  rather  than  actual 
that  is  here  under  discussion ;  and  even  this  depends  for  its 
effectiveness  on  the  action  of  the  rising  generation. 

Cost,  in  the  sense  of  personal  sacrifice,  governing  prices 
within  the  fields  in  which  potential  competition  exists,  is  the 
summary  of  this  noteworthy  theory.  The  criticism  to  be  made 
upon  it  is  that  the  application  of  its  more  fundamental  princi- 
ple, that  which  connects  the  prices  of  commodities  with  the 
sacrifices  involved  in  producing  them,  is,  in  modern  industry, 
far  wider  than  the  author  of  the  theory  supposed,  and  wider 
than  it  was,  in  fact,  in  European  countries  at  the  time  when  he 
published  his  work.  The  limitations  which  he  imposed  on  the 
action  of  this  principle  are  no  longer  necessary,  and  the  four- 
fold grouping  of  laborers  according  to  their  personal  qualities 
no  longer  corresponds  with  anything  in  actual  life. 

Modern  methods  of  production  have  obliterated  Professor 
Cairnes'  dividing  lines.  Potential  competition  extends  to  every 
part  of  the  industrial  field  in  which  men  work  in  organized  com- 
panies. Throwing  out  of  account  the  professions,  a  few  trades 
of  the  highest  sort,  and  the  class  of  labor  which  is  performed 
by  employers  themselves  and  their  salaried  assistants,  it  is 
practically  true  that  labor  is  in  a  universal  ebb  and  flow ;   it 


THE  LIMITS  OF  COMPETITION.  J 

passes  freely  to  occupations  which  arc,  for  the  time  being, 
highly  paid,  and  reduces  their  rewards  to  the  general  level. 

This  objection  to  the  proposed  grouping  is  not  theoretical. 
The  question  is  one  of  fact ;  it  is  the  development  of  actual 
industry  that  has  invalidated  the  theory  which,  ten  years  ago, 
expressed  an  important  truth  concerning  economic  relations  in 
England.  Moreover,  the  author  of  the  theory  anticipated  one 
change  which  would  somewhat  lessen  its  applicability  to  future 
conditions.  He  recorded  his  belief  that  education  would  prove 
a  leveller,  and  that  it  would  merge  to  some  extent  the  strata  of 
industrial  society.  The  children  of  hod-carriers  might  become 
machinists,  accountants,  or  lawyers  when  they  could  acquire 
the  needed  education.  He  admitted  also  that  new  countries 
afford  conditions  in  which  the  lines  of  demarcation  are  faint. 
He  was  not  in  a  position  to  appreciate  the  chief  levelling 
agency,  namely,  the  machine  method  of  production  as  now 
extended  and  perfected.  Education  makes  the  laborer  capable 
of  things  relatively  difficult,  and  machines  render  the  processes 
which  he  needs  to  master  relatively  easy.  The  so-called  un- 
skilled workmen  stand  on  a  higher  personal  level  than  those 
of  former  times  ;  and  the  new  methods  of  manufacturing  are 
reducing  class  after  class  to  that  level.  Mechanical  labor  is 
resolving  itself  into  processes  so  simple  that  any  one  may  learn 
them.  An  old-time  shoemaker  could  not  become  a  watchmaker, 
and  even  his  children  would  have  found  difficulties  in  their  way 
had  they  attempted  to  master  the  higher  trade ;  but  a  laster  in 
a  Lynn  shoe  factory  can,  if  he  will,  learn  one  of  the  minute 
trades  that  are  involved  in  the  making  of  a  Waltham  watch. 
His  children  may  do  so  without  difficulty ;  and  this  is  all  that 
is  necessary  for  maintaining  the  normal  balance  betvv^een  the 
trades. 

The  largest  surviving  differences  between  workmen  are 
moral.  Bodily  strength  still  counts  for  something,  and  mental 
strength  for  more ;  but  the  consideration  which  chiefly  deter- 
mines the  value  of  a  workman  to  the  employer  who  entrusts  to 
him  costly  materials  and  a  delicate  machine  is  the  question  of 
fidelity.     Character  is  not  monopolized  by  any  social  class ;  it 


8  POLITICAL  SCIENCE  QUARTERLY. 

is  of  universal  growth,  aixd  tends,  by  the  prominent  part  which 
it  plays  in  modern  industry,  to  reduce  to  their  lowest  terins  the 
class  differences  of  the  former  era. 

The  rewards  of  professional  life  are  gauged  primarily  by 
character  and  native  endowment,  and  are,  to  this  extent,  open 
to  the  children  of  workmen.  New  barriers,  however,  arise 
here  in  the  ampler  education  which,  as  time  advances,  is 
demanded  of  persons  in  these  pursuits  ;  and  these  barriers  give 
to  a  part  of  the  fourth  and  highest  class  in  the  scheme  that 
we  are  criticising  a  permanent  basis  of  existence.  Another 
variety  of  labor  retains  a  pre-eminence  based  on  native  adapta- 
tions and  special  opportunities.  It  is  the  work  of  the  employer 
himself.  It  is  an  organizing  and  directing  function,  and  in 
large  industries  is  performed  only  in  part  by  the  owners.  A 
portion  of  this  work  is  committed  to  hired  assistants.  Strictly 
speaking,  the  entrepreneur,  or  employer,  of  a  great  establishment 
is  not  one  man,  but  many,  who  work  in  a  collective  capacity, 
and  who  receive  a  reward  that,  taken  in  the  aggregate,  con- 
stitutes the  "wages  of  superintendence."  To  some  members 
of  this  administrative  body  the  returns  come  in  the  form  of 
salaries,  while  to  others  they  come  partly  in  the  form  of  divi- 
dends ;  but  if  we  regard  their  work  in  its  entirety,  and  consider 
their  wages  in  a  single  sum,  we  must  class  it  with  entrepreneur  s 
profits  rather  than  with  ordinary  wages.  It  is  a  different  part 
of  the  product  from  the  sum  distributed  among  day-laborers  ; 
and  this  fact  separates  the  administrative  group  from  the  class 
considered  in  our  present  inquiry.  Positions  of  the  higher  sort 
are  usually  gained  either  through  the  possession  of  capital,  or 
through  relations  to  persons  who  possess  it.  Though  clerkships 
of  the  lower  grade  demand  no  attainments  which  the  children 
of  workmen  cannot  gain,  and  though  promotion  to  the  higher 
grades  is  still  open,  the  tendency  of  the  time  is  to  make  the 
transition  from  the  ranks  of  labor  to  those  of  administration 
more  and  more  difficult.  The  true  laboring  class  is  merging 
its  subdivisions,  while  it  is  separating  more  sharply  from  the 
class  whose  interests,  in  test  questions,  place  them  on  the  side 
of  capital. 


THE  LIMITS  OF  COMPETITION:  9 

If  we  consider  individuals  of  the  higtier  group,  we  shall  find 
that  the  grounds  for  classifying  them  separately  from  wage- 
workers  are  not  always  distinct.  It  may  be  doubtful  whether 
a  particular  man  should  be  rated  as  a  workman,  or  as  a  subor- 
dinate member  of  the  employer's  staff.  In  the  case  of  respon- 
sible managers  this  uncertainty  disappears.  The  manager  of  a 
great  manufactory  does  what  is  clearly  identified  as  entrepreneur  s 
work,  and  receives  a  reward  which,  in  the  minds  of  those  who 
pay  it,  stands  in  a  recognized  ratio  to  the  product  which  is 
secured  by  his  efificiency.  Such  a  man  is  identified  with  em- 
ployers in  interest,  acts  with  them  when  labor  conflicts  arise, 
and  carries  with  him  the  staff  of  assistants  who  help  to  execute 
his  plans  and,  in  some  degree,  share  his  fortunes.  Here  lies 
the  essential  distinction  between  salaried  labor  and  the  true 
wage-labor  to  which  our  inquiry  is  now  confined. 

America  affords  the  conditions  most  favorable  to  the  levelling 
process  which  is  reducing  the  workman  proper  to  a  single  social 
stratum.  To  this  extent  our  democracy  has  an  economic  basis. 
Free  education  and  native  versatility  elevate  the  lower  sub- 
strata, while  machine  processes  depress  the  higher.  High 
general  wages  assist,  by  placing  within  the  reach  of  the  children 
of  the  state  that  modicum  of  training  which  opens  many  callings 
to  their  selection.  The  barriers  that  separated  wage-earners 
into  broad  non-competing  strata  are,  to  all  intents  and  purposes, 
things  of  the  past. 

Art  may  create  barriers  where  nature  has  destroyed  them. 
The  concerted  action  of  men  may  set  in  motion  aristocratizing 
influences,  where  a  natural  evolution  would  lead  to  democracy. 
Trades  unions  may  obstruct  the  transfer  of  labor  from  one  occu- 
pation to  another,  and  create  a  partial  monopoly  of  favored 
employments.  Restrictions  on  apprenticeships  like  those  which 
prevailed  among  the  mediaeval  guilds  might,  if  carried  far 
enough,  erect  a  palisade  around  each  of  the  minute  trades  which 
the  factory  system  has  developed,  and  substitute  for  the  general 
strata  of  former  times  an  artificial  grouping  far  more  undemo- 
cratic in  its  practical  working.  Labor  organization  has  in  fact 
taken  this  course,  to  an  extent  that  produces  appreciable  effects 


lO  POLITICAL  SCIENCE  QUARTERLY. 

on  relative  wages.  The  boy  who  has  both  time  and  abihty  to 
learn  a  trade  is  not  always  permitted  to  do  so ;  and  hence  arises 
the  need  of  trade  schools,  especially  in  self-governing  countries. 
It  is  an  important  question  whether  the  principle  of  equality 
and  consequent  fraternity  is  to  prevail  over  the  artificial  tendency 
to  exclusiveness  and  antagonism.  In  the  long  run  and  in  the 
general  field  it  must  prevail ;  the  forces  in  its  favor  are  too  pow- 
erful to  be  resisted.  The  education  which  increases  men's 
working  ability,  the  change  of  method  which  makes  less  and 
less  demands  on  that  ability,  supplemented  by  the  public  senti- 
ment that  revolts  at  the  policy  of  denying  to  men  the  oppor- 
tunity to  do  what  they  can  for  themselves  and  for  society,  will 
keep  within  bounds  the  effort  to  monopolize  skill  by  reviving 
guild  regulations.  Trades  unions  may,  for  some  time,  interpose 
obstacles  to  the  free  transfer  of  labor  to  the  points  of  greatest 
demand,  which  is  the  potential  competition  of  Professor  Cairnes' 
theory  ;  but,  in  the  long  run,  causes  beyond  arbitrary  control 
will  keep  this  movement  nearly  free. 

It  is  not  workmen  but  employers  who  have  erected  the  chief 
artificial  barriers  against  competition.  A  startling  recent  devel- 
opment is  the  system  of  combinations  by  which  producers  of 
particular  articles  have  attempted  arbitrarily  to  control  the 
supply  and  the  market  value  of  their  respective  products.  This 
apparently  wholesale  abrogation  of  economic  law  was  unthought 
of  by  early  economists ;  and  although  in  Professor  Cairnes'  time 
the  pooling  process  had  begun,  even  he  regarded  capital  as  in 
a  universal  ebb  and  flow,  ready  to  move  spontaneously  to  the 
point  where  it  could  gain  the  largest  returns.  Toward  the 
close  of  what  we  have  termed  the  century  of  transition,  pro- 
ducers' combinations  appeared  on  a  large  scale  ;  and  very  lately 
they  have  stolen  a  forced  march  upon  economists.  While  we 
slept,  as  it  were,  and  dreamed  of  the  regulation  of  values  by 
the  automatic  flow  of  capital  to  the  points  of  highest  profit,  the 
principle  apparently  ceased  to  operate  within  very  extensive 
fields.  It  would  be  easy  to  name  a  hundred  staple  articles, 
like  glass,  wall-paper,  cut  nails,  screws,  files,  spool  silk,  anthra- 
cite coal,  steel  rails,  etc.,  of  which  the  supply  and  the  market 


THE  LIMITS  OF  COMPETITION:  \  \ 

value  are  fixed  by  agreement  by  strong  associations  of  producers. 
The  scientific  significance  of  this  transition  is  a  question  for 
immediate  study.  Have  we  come  unconsciously  under  a  regime 
of  arbitrary  values }  Is  the  old  regulating  principle,  competition, 
abrogated.'  Is  it  subject  to  disturbances  so  vast  and  uncertain 
as  to  baffle  scientific  calculation  } 

The  practical  inquiry  must  be  guided  here  as  elsewhere  by  a 
study  of  principles.  Combinations  have  their  roots  in  the 
nature  of  social  industry  and  are  normal  in  their  origin,  their 
development,  and  their  practical  working.  They  are  neither  to 
be  deprecated  by  scientists  nor  suppressed  by  legislators.  They 
are  the  result  of  an  evolution,  and  are  the  happy  outcome  of  a 
competition  so  abnormal  that  the  continuance  of  it  would  have 
meant  wide-spread  ruin.  A  successful  attempt  to  suppress  them 
by  law  would  involve  the  reversion  of  industrial  systems  to  a 
cast-off  type,  the  renewal  of  abuses  from  which  society  has 
escaped  by  a  step  in  development.  Combinations  are  to  be 
accepted,  studied,  and,  probably,  regulated ;  they  ought  not  to 
be  suppressed  if  such  action  were  practicable.  This  action  is 
fortunately  not  practicable  except  in  the  early  stages  of  their 
growth,  while  their  form  is  still  crude,  and  while  the  initial  dififi- 
culties  of  the  system  are  great.  The  repressive  policy  may 
then,  for  a  time,  succeed  ;  but  it  must  be  at  the  cost  of  social 
retrogradation  and  economic  loss. 

Modern  production  is  not  an  individualistic  process  ;  it  is  the 
act  of  society  as  a  whole,  and  each  separate  man  in  the  ranks 
finds  his  function  narrowly  limited.  Parts  of  the  productive 
operation  are  assigned  to  sub-organizations,  and  these  are  sub- 
jected to  a  discipline  which  limits  each  member  to  an  infinites- 
imal part  of  general  industry.  He  may  be  one  of  a  group  that 
collectively  cuts  trees,  or  of  another  that  saws  logs,  or  of  another 
that  fashions  lumber  into  furniture.  The  chair  that  a  primitive 
settler  would  have  hewn  out  with  an  axe  is  the  product  of  one 
of  the  numerous  sub-organisms  of  society.  The  relations  of 
these  sub-organisms  to  each  other,  though  intricate,  are  capable 
of  clear  analysis.  We  select  a  typical  one  for  study,  and,  to 
avoid  confusion,  consider  no  relations  that  are  not  essential  to 


12  POLITICAL  SCIENCE  QUARTERLY. 

our  present  purpose.    Crudely  represented,  the  furniture-making 
group  arranges  itself  as  follows  : 


Finishing 


Cabinet  making 

Transporting 
Lumber  dealing 

Wood  cutting 

Each  stratum  shows  a  subdivision  into  capitalists  and  work- 
men ;  and  in  each  case  there  range  themselves  on  the  side  of 
the  capitalists  a  few  men  of  managing  ability,  who  constitute 
with  their  employer  a  sort  of  collective  entrepreneur,  and  whose 
rewards,  in  the  form  of  salaries,  have  more  in  common  with 
profits  than  they  have  with  wages. 

True  competition  is  limited  by  nature  to  the  strata  here  in- 
dicated ;  cutters  compete  only  with  cutters,  lumber  dealers  with 
lumber  dealers,  etc.  The  distinction  between  this  grouping 
and  that  of  Professor  Cairnes  consists,  not  in  the  fact  that  the 
classification  here  proposed  follows  the  lines  of  occupation,  but 
in  the  fact  that  it  is  based  on  real  and  not  on  potential  compe- 
tition. Whether  a  workman  can  or  cannot  transfer  himself 
from  one  sub-group  to  another  is  a  question  which  we  do  not 
raise.  We  inquire  simply  with  whom  he  competes  while  re- 
maining in  his  own  group  and  continuing  to  discharge  his 
special  function.  In  this  lies  the  practical  fruit  to  be  gained  by 
a  study  of  the  grouping.  As  bearing  on  the  direct  adjustment 
of  relative  wages,  the  question  to  be  considered  is :  Whether 
wood-cutters  are  potential  competitors  of  furniture  makers,  etc.; 
whether  they  or  their  children  have  such  a  choice  of  occupa- 
tions open  to  them  that  the  rewards  of  all  tend  toward  a  general 
uniformity  .-•  As  bearing  on  the  question  which  we  are  now  con- 
sidering, the  point  to  be  studied  is  :  What  groups  of  men  are 
brought  into  competition  with  each  other  by  the  nature  of  their 
industrial  functions,  and  what  consequences  result  from  this 
grouping."*  It  is  to  be  noted,  moreover,  that  in  the  sale  of  com- 
modities, finished  or  unfinished,  the  competition  is  not  between 


THE  LIMITS  OF  COMPETITION:  1 3 

workmen,  nor  between  employers,  separately  considered,  but 
between  industrial  establishments  in  their  entirety.  One 
furniture  manufactory  as  a  whole  competes  with  another.  Each 
is  an  organism  in  itself ;  and  although  the  employer  in  each 
case  becomes  the  owner  of  the  product,  and  places  it  in  his  own 
name  upon  the  market,  yet  his  relations  with  his  men  are  such 
as  to  make  them  partners  in  the  sacrifice  which  creates  the 
product,  and  in  the  rewards  derived  from  it.  It  is  the  efficiency 
of  both  workmen  and  employers,  and  the  relations  between  the 
two,  that  determine  the  competing  ability  of  an  industrial  estab- 
lishment. Competition  in  the  sale  of  commodities  is  limited  to 
establishments  of  the  same  sub-class  ;  it  is  confined  by  nature 
within  horizontal  lines  like  those  which,  in  the  case  of  one 
representative  group,  we  have  indicated  in  the  foregoing 
diagram. 

These  sub-groups  are  now  solidifying.  Within  many  of  the 
pairs  of  parallel  lines  competition  has  exterminated  the  weak 
producers,  and  becoming  fiercer  as  the  survivors  become  fewer 
and  stronger,  is  compelling  them,  in  the  end,  to  unite  or  perish. 
"  Let  us  have  peace  "  has  become  the  watchword  in  this  part  of 
the  field  ;  and  the  truce  which  has  ensued  has  taken  the  form  of 
a  system  of  producers'  combinations. 

These  unions  aim  to  fix  prices  and,  as  a  means  thereto,  to 
restrict  production.  The  one  process  limits  actual  competition, 
and  the  other  potential.  To  decide  upon  a  price  list,  and  to 
abide  by  it,  is  to  allay  the  rivalry  between  similar  producers  ; 
to  restrict  production  is  to  disturb  the  relations  between  dis- 
similar producers.  An  arbitrary  restriction  upon  the  amount 
of  a  commodity  which  can  be  placed  upon  the  market  checks 
the  enlargement  of  the  industry,  and  thus  obstructs  the  transfer 
of  labor  and  capital  from  group  to  group  —  which  is  the  poten- 
tial competition  of  Professor  Cairnes'  theory.  Could  each  group 
solidify  into  a  corporation  that  could  control  its  members  within 
and  suppress  rivalry  without,  the  whole  industrial  field  would 
become  definitely  non-competitive.  The  old  regulator  of  values 
would  be  lost,  and  the  appeal  for  state  intervention  would  ac- 
quire great  force.     The  study  of  the  coming  interval  is  that  of 


14  POLITICAL  SCIENCE  QUARTERLY. 

the  principles  which  make  a  general  appeal  of  this  kind  un- 
necessary. It  is  the  study  of  competition  in  residual  forms. 
The  process  is  taking  on  an  advanced  type,  less  simple  than 
that  of  earlier  times,  and  more  legitimate  than  that  which  has 
lately  developed.  Residual  competition  of  the  actual  kind  sub- 
sists between  productive  establishments  of  comparatively  equal 
strength  in  combination  with  each  other ;  and  residual  competi- 
tion of  the  potential  kind  is  maintained  between  the  entire 
combination  and  the  remainder  of  society.  The  members  of 
the  pool  are  still  rivals ;  and  capital  and  labor  may  still  transfer 
themselves  to  and  from  the  industry  which  they  try  to  control. 
Monopoly  prices  have  not  been  long  maintained  by  any  of  these 
organizations  ;  and  this  fact  is  due,  not  to  chance,  but  to  com- 
plex and  interesting  economic  laws.  Leaving  the  discussion  of 
these  principles  to  one  whose  analysis  derives  weight  from 
practical  observation,  I  close  this  paper  with  a  brief  reference 
to  the  conditions  which  determine  the  transition  from  the  era 
of  predatory  competition  to  that  of  union. 

If  each  industry  were  represented  by  a  diagram  like  the  one 
by  which  we  have  rudely  shown  the  relation  of  sub-classes  in 
the  furniture-making  group,  it  would  be  found  that  the  horizon- 
tal lines  which  bound  the  fields  of  competition  bound  also  those 
of  combination.  The  combining  groups  are  the  natural  compet- 
ing groups  of  industrial  society.  The  limitation  of  these  fields 
is  important.  The  fewer  are  the  competitors,  the  fiercer  is  the 
strife  and  the  greater  is  the  need  of  union.  The  fewer  are  the 
competitors,  the  easier  is  the  pooling  process.  The  effect  of 
the  union  is  to  turn  the  belligerent  energies  of  society  in  a  new 
direction.  Under  the  old  system  it  was  rival  producers  that 
destroyed  each  other ;  under  the  new  system  it  is  producers  of 
dissimilar  articles  whose  interests  come  into  overt  conflict.  To 
limit  the  supply  and  raise  the  price  of  a  commodity  is  to  make 
members  of  other  producing  groups  give  for  it  an  increased 
proportion  of  their  own  products ;  and  if  this  attempt  is  met '  by 
a  similar  proceeding  on  their  part,  there  results  an  industrial 
war,  the  battles  of  which  are  fought  across  the  horizontal  lines, 
instead  of  between  them.     If  unions  were  general,  the  lumber- 


THE  LIMITS  OF  COMPETITION.  15 

men  of  the  foregoing  diagram  would  cease  to  attack  each  other, 
and  collectively  do  battle  with  the  transporters  and  furniture 
makers.  Treaties  of  alliance  on  the  old  battle-ground,  hostility 
at  the  point  of  former  amity,  —  such  are  the  results  of  the  tran- 
sition to  the  new  system.  The  field  of  economic  war  and  the 
nature  of  the  belligerent  process  are  both  changed. 

Combinations  are  the  product  of  a  social  evolution,  and  can 
have  no  permanent  existence  until  the  Darwinian  contest  be- 
tween the  weak  and  the  strong  has  completed  its  work.  The 
surviving  competitors  must  be  few,  strong,  and  nearly  equal. 
Marked  inequalities  of  strength  among  the  members  of  the 
group  defer  the  formation  of  the  union,  or  break  it  when  it  is 
formed  prematurely.  Rivals  do  not  combine  so  long  as  one  is 
conscious  of  the  power  to  exterminate  the  other.  Moreover, 
strength  for  such  a  contest  consists  not  merely  in  the  size  of  a 
producing  establishment,  although  that  is  an  element  to  be  con- 
sidered ;  it  consists  primarily  in  advantages  for  economical  pro- 
duction. Location  is  important,  but  the  paramount  influence 
is  the  mastery  of  cheap  methods.  Natural  selection  locates 
industries  in  the  most  favorable  localities,  and  brings  them  to 
some  equality  in  method ;  and  until  this  is  done  there  is  no 
chance  for  an  economic  truce. 

In  agriculture  the  number  of  competitors  bars  the  way  for  the 
formation  of  unions.  It  is  to  be  noted  that  the  prices  of  food 
products  are  especially  sensitive  to  changes  in  supply ;  and  if  a 
combination  could  restrict  the  crops  uniformly  and  very  moder- 
ately, it  could  force  the  members  of  other  industrial  departments 
to  pay  double  or  quadruple  prices  for  the  means  of  living. 
Against  such  a  calamity  the  nature  of  the  agricultural  industry 
interposes  its  bar.  Anthracite  coal  is  somewhat  like  a  food 
product  in  its  importance,  and  in  the  variations  which  the  price 
undergoes  in  consequence  of  changes  in  the  supply.  Coal-min- 
ing affords  strong  inducements  and  exceptional  facilities  for  the 
pooling  process,  and  it  is  here  that  the  effects  of  union  are 
especially  harmful  to  society.  That  the  injury  thus  far  done 
has  not  been  greater  than  it  has  been  is  due  to  residual  com- 
petition, though  it  has  worked  under  unusual  disadvantages. 


1 6  POLITICAL  SCIENCE  QUARTERLY. 

The  value  of  this  regulating  agent  under  favorable  circum- 
stances must  be  indefinitely  greater. 

Portability  in  the  commodity  produced  is  essential  to  the 
formation  of  a  combination  on  a  national  scale.  The  large  estab- 
lishment must  be  able  to  reach  with  its  product  the  entire  ter- 
ritory, and  that  without  incurring  a  cost  for  transportation  which 
would  prevent  it  from  underselling  the  small  local  producers. 
Baskets  are  made  with  great  economy  in  a  large  shop  ;  but  their 
bulk  subjects  them  to  a  cost  for  transportation  that  enables  the 
local  manufacturers,  though  working  with  less  economy,  to  hold 
their  respective  fields,  and  defeats  the  formation  of  a  union  in 
this  industry.  In  the  silk  manufacture  the  freight  costs  practi- 
cally nothing,  and  the  mill  which  produces  cheaply  has  at  its 
command  all  parts  of  the  national  territory  to  which  its  agents 
choose  to  travel.  The  silk  industry  offers,  in  this  respect,  a 
favorable  field  for  combination.  Moreover,  cheapness  of  trans- 
portation depends  not  only  on  the  nature  of  a  product,  but  also 
on  the  development  of  an  efficient  railroad  system.  The  low 
rates  for  freight  now  prevailing  in  this  country  have  done  much 
to  create  combinations  among  manufacturers ;  if  pools  among 
the  railroads  themselves  were  to  restore  the  former  cost  of 
transportation,  they  would  undo  this  work.  The  economic  war 
bet\C^een  transporters  and  other  groups  of  industrial  society 
promises  to  result  so  favorably  to  the  other  groups  as  to  facili- 
tate combinations  among  them. 

In  but  few  instances  has  the  principle  of  union  among  pro- 
ducers shown  a  capacity  to  cross  national  lines  ;  and  in  so  far  as 
a  protective  tariff  debars  the  foreigner  from  being  an  efficient 
competitor  within  the  limits  of  a  country,  it  hastens  the  forma- 
tion of  pools  within  those  limits.  In  any  case  foreign  com- 
petition acts  as  a  check  upon  the  raising  of  prices  after  a 
combination  has  been  formed. 

The  industrial  world  would  seem  to  be  dividing  into  two  por- 
tions, in  one  of  which,  embracing  the  most  important  of  all 
forms  of  production,  namely,  that  of  agriculture,  the  principle 
of  individual  competition  continues,  and  produces  results  so 
beneficial  to  society  as  to  justify  the  enthusiasm  of  the  early 


THE  LIMITS  OF  COMPETITION. 


17 


economists  for  competition  as  a  regulator  of  values  and  a 
divider  of  the  fruits  of  industry.  In  the  other  economic  divis- 
ion, embracing  transportation  and  a  majority  of  manufactures, 
the  principle  of  combination  is  asserting  itself,  and  introducing 
a  n'ginie  in  which  prices  are  regulated  by  competition  in  latent 
and  residual  forms.  Whether  these  surviving  types  of  competi- 
tion are  so  nearly  adequate  to  the  regulating  work  which  must 
be  done  that  no  state  action  is  called  for,  is  a  debatable  question. 
Whether  state  action  should  take  the  form  of  a  legal  suppres- 
sion of  combinations  is  a  question  which  a  brief  trial  of  such  a 
policy  would  place  beyond  the  debatable  line.  To  regulate 
combinations  is  possible  and,  in  some  directions,  desirable ;  to 
permanently  suppress  them  is  impossible ;  to  temporarily  re- 
press them  is  either  to  force  them  into  illegal  forms,  or  to 
restore  the  internecine  war  from  which  a  natural  evolution  has 
delivered  us.  To  accept  the  results  of  this  evolution  and  to 
meet  the  demands  of  the  new  era  is  the  part  of  wisdom. 

John  B.  Clark. 


THE   PERSISTENCE   OF    COMPETITION. 

THE  late  Walter  Bagehot  probably  knew  the  "  market  " 
better  than  any  other  thinker  who  has  grappled  with 
theoretical  questions  of  political  economy.  This  fact  lends 
weight  to  his  views  of  the  present,  past,  and  future  of  compe- 
tition, as  presented  in  those  luminous  essays  on  The  Postulates 
of  English  Political  Economy,  written  just  before  his  death. 
John  Stuart  Mill  had  said  that  "only  through  the  principle  of 
competition  has  political  economy  any  pretension  to  the  charac- 
ter of  a  science,"  ^  —  a  dictum  that  compressed  into  a  sentence 
the  economic  system  of  Ricardo,  James  Mill,  Senior,  and 
McCulloch.  John  Stuart  Mill  himself  distinctly  recognized 
the  hypothetical  character  of  this  system,  and  in  the  chapter 
on  "  Competition  and  Custom  "  he  undertook  to  show  that  it 
was  only  the  wholesale  trade  and  the  great  articles  of  com- 
merce that  were  really  under  the  dominion  of  competition. 
At  the  same  time  he  asserted  that  the  influence  of  competition 
was  "  making  itself  felt  more  and  more  through  the  principal 
branches  of  retail  trade  in  the  large  towns,"  and  that  "  the 
rapidity  and  cheapness  of  transport,  by  making  consumers  less 
dependent  on  the  dealers  in  their  immediate  neighborhood," 
were  "  tending  to  assimilate  more  and  more  the  whole  country 
to  a  large  town."  Mr.  Bagehot,  bringing  to  his  investigations 
a  rare  mastery  of  deductive  reasoning,  a  breadth  of  view  gained 
by  many  excursions  into  the  domains  of  history  and  physical 
science,  and  the  worldly  sagacity  of  a  practical  business  man  of 
Lombard  Street,  became  convinced  that  the  fundamental  postu- 
lates of  English  political  economy,  besides  being  only  hypo- 
thetically  true  for  a  great  portion  of  modern  European  society, 
were  not  true  at  all  for  uncivilized  and  semi-civilized  societies, 
nor  for  European  societies  in  their  primitive  eras.     His  demon- 

^  Principles  of  Political  Economy,  chapter  on  Competition  and  Custom,  second 
paragraph. 


THE  PERSISTENCE  OF  COMPETITION: 


19 


stration  that  in  the  undeveloped  society  there  is  no  free  trans- 
ferabihty  of  labor  was  based  largely  on  the  researches  of  such 
investigators  as  Sir  Henry  Sumner  Maine  ;  but  his  demonstra- 
tion that  capital  was  not  so  transferable  until  very  recent  times, 
and  in  modern  times  is  so  transferable  only  in  the  great  com- 
mercial nations  like  England,  is  peculiarly  his  own.  It  consists 
in  showing  that  the  free  transferability  of  capital,  and  therefore 
the  perfect  competitive  action  of  capital,  depends  on  three  con- 
ditions, namely  :  the  existence  of  a  vast  loan  fund,  the  existence 
of  a  vast  speculative  fund,  and  the  free  movement  of  young 
men  into  those  channels  of  business  that  promise  the  largest 
profits.^  Formerly  neither  of  these  conditions  existed.  Until 
recently  they  existed  only  in  financial  centres  like  London,  but 
to-day  they  exist  so  generally  that  their  influence  begins  to  be 
universally  felt.  In  this  fact  Mr.  Bagehot  discerned  the  true 
cause  of  the  rapid  extension  of  competitive  economics  beyond 
the  limits  of  wholesale  trade.  The  laws  of  the  "  great  com- 
merce "  were  being  irresistibly  forced  upon  the  minor  com- 
merce. Accordingly  he  concluded  :  "  As  '  men  of  the  world  '  are 
the  same  everywhere,  so  the  great  commerce  is  the  same  every- 
where. Local  peculiarities  and  ancient  modifying  circumstances 
fall  away  in  both  cases  ;  and  it  is  of  this  one  and  uniform  com- 
merce which  grows  daily,  and  which  will  grow,  according  to 
every  probability,  more  and  more,  that  English  political  econ- 
omy aspires  to  be  the  explanation."  ^  In  a  word,  it  was  Mr. 
Bagehot's  final  conclusion  that  the  mobility  of  labor  and  capital 
is  to  become  practically  perfect,  and  the  economic  science  based 
on  "the  principle  of  competition,"  though  not  true  at  all  of  the 
economic  world  of  the  past,  is  to  become  completely  true  of  the 
economic  world  of  the  future. 

Meanwhile  Professor  J.  E.  Cairnes,  in  his  attempt  to  adapt 
the  deductive  political  economy  more  perfectly  to  the  present 
facts  of  economic  society,  had  discovered  limitations  of  compe- 
tition not  imposed  by  "local  peculiarities  or  ancient  modifying 
circumstances,"  but  inherent  in  the  nature  of  men,  and  there- 

1  Economic  Studies,  edited  by  R.  H.  Ilutton,  pp.  45-47. 
^  Economic  Studies,  p.  20. 


20  POLITICAL  SCIENCE  QUARTERLY. 

fore  permanent.  Here,  then,  in  the  constitution  of  the  "  non- 
competing  groups  "  was  an  obstacle  to  the  fulfilment  of  Mr. 
Bagehot's  predictions  that  could  by  no  possibility  disappear. 
This  limitation  was  not  regarded,  however,  as  of  the  greatest 
importance.  It  would  have  the  effect  of  creating  a  sort  of 
stratification  of  prices,  but  within  each  stratum  the  prices  of 
specific  services  and  things  would  be  determined  more  and 
more  perfectly  by  competition.  Professor  Cairnes  himself  dis- 
tinctly admitted  the  importance  of  the  loan  and  speculative 
funds  as  a  competitive  force. 

It  is  plain,  too  [he  said],  that  the  capital  thus  disposable  is  sufficient 
for  the  purpose  we  have  here  in  view,  namely,  to  render  competition 
effective  among  the  various  industries ;  since  we  find  a  portion  of  it  con- 
stantly moving  abroad  for  foreign  investment  —  a  destination  it  would 
scarcely  receive  while  there  was  a  prospect  of  reaping  exceptionally  high 
returns  from  investment  within  the  country.  We  have,  therefore,  in  the 
existence  of  this  fund  all  that  is  required  for  a  practically  effective  corn- 
petition,  so  far  as  one  instrument  of  production  is  concerned,  and  this 
without  necessitating  any  serious  encroachment  on  the  capital  actually 
engaged  in  productive  operations.^ 

Little  more  than  a  decade  has  passed,  and  we  witness  a  state 
of  things  that,  to  superficial  observation  at  least,  seems  totally 
to  contradict  these  final  conclusions  at  which  Ricardian  political 
economy  had  arrived.  Just  when  the  disappearance  of  the  last 
vestiges  of  a  volitional  restriction  of  competition  was  looked 
for,  and  the  universal  application  of  the  "  rule  of  the  market  " 
was  confidently  expected,  we  see  a  wide-spread  revival  of  eco- 
nomic methods  and  agencies  over  which  The  Wealth  of  Nations 
was  read  as  a  funeral  service.  And  most  remarkable  of  all,  it 
is  not  only  labor,  to  the  absolutely  free  competition  of  which 
natural  and  permanent  limitations  were  admitted,  but  capital  — 
that  very  agent  which  Mr.  Bagehot  said  "  runs  as  surely  and 
instantly  where  it  is  most  wanted  and  where  there  is  most  to  be 
made  of  it,  as  water  runs  to  find  its  level,"  ^  that  seems  to  have 
voluntarily  massed  itself  into  a  solidarity,  hedged  itself  about 

^  Leading  Principles,  Harper's  ed.,  pp.  63,  64. 
^  Lombard  Street,  p.  13. 


THE  PERSISTENCE  OF  COMPETITION:  2 1 

with  new  and  most  ingenious  restrictions,  and  bound  itself  by 
heavy  penalties  not  to  run  to  any  new  level  or  deviate  from 
wonted  channels.  This  increasing  prominence  of  pools  and 
combinations  has  given  a  new  direction  to  theoretical  thought. 
A  majority  of  the  working  economists  who  have  kept  up  with 
the  progress  of  events  no  longer  look  to  see  the  supremacy  of 
an  unhindered  competition.  By  not  a  few  of  the  ablest  investi- 
gators the  gradual  suppression  of  the  competition  now  existing 
is  predicted.  Instead  of  moving  toward  freer  competition,  they 
affirm,  we  are  moving  away  from  it,^  and  reasons  are  offered  to 
show  that  in  the  very  nature  of  business  facts  no  other  result 
is  possible.  Not  only  of  such  vast  organizations  of  capital  as 
the  railroad  system  is  thi^  tendency  supposed  to  be  true,  but  of 
almost  all  industries  having  a  large  permanent  investment.^ 
New  agencies  for  adjusting  prices  it  is  expected  will  be  neces- 
sary. Between  a  solid  body  of  non-competing  employers  on 
one  side,  and  a  solid  body  of  non-competing  workingmen  on  the 
other,  will  have  to  stand  committees  of  conciliation  and  boards 
of  arbitration.^  The  standard  of  \.\\c justiivi prctiitm,  the  "rea- 
sonable price "  of  the  middle  ages,  will  be  again  set  up  and 
enforced  by  an  appeal,  through  compulsory  publicity,  to  public 
opinion.* 

That  combinations  are  to  play  an  increasingly  important  part 
in  economic  affairs,  is  altogether  probable.  But  that  competi- 
tion is  to  be  to  a  corresponding  extent  destroyed,  and  that 
arbitration  and  publicity  are  to  perform  any  other  function  than 
that  of  equalizing  temporary  inequalities  of  competition,  as 
commercial  credit  equalizes  temporary  inequalities  of  economic 
pressure,  or  as  insurance  equalizes  temporary  inequalities  of 
loss,  are  conclusions  that  should  not  be  too  hastily  accepted. 
We  should  be  on  our  guard  against  two  assumptions.  We  must 
not  assume  that  because  competition  is  not  observable  in  the 
form  seen  on  the  produce  exchange,  it  is  not  discoverable  in 

1  Arthur  T.  Hadley,  Railroad  Transportation,  p.  65. 

'  Hadley,  Private  Monopolies  and  Public  Rights,  Quarterly  Journal  of  Eco- 
nomics, October,  1886. 

8  John  B.  Clark,  The  Philosophy  of  Wealth,  p.  66. 

*  Report  of  the  Connecticut  Bureau  of  Labor  Statistics,  1885,  pp.  16,  106. 


2  2  POLITICAL  SCIENCE  QUARTERLY.  ' 

any  form.  We  must  not  assume  that  when  market  competition 
is  imperfect  it  may  be  ignored,  as  if  it  were  quite  non-existent. 
These  assumptions  would  be  as  unwarrantable  as  the  assump- 
tion of  the  a  prioj'i  economists  has  been  in  regarding  the  laws 
of  the  wholesale  market  as  so  nearly  true  of  economic  society 
everywhere  and  always  that  conflicting  facts  might  be  dis- 
missed as  irrelevant.  That  competition  in  some  form  is  a  per- 
manent economic  process,  is  an  implication  of  the  conservation 
of  energy.  Given  an  aggregate  of  units  of  unequal  energy, 
their  unequal  activity  is  an  inevitable  consequence.  With  the 
complexity  of  social  environment  that  every  quarter  of  the  earth 
presents,  and  the  limitless  variations  of  heredity,  a  society  com- 
posed of  individuals  of  equal  energy  is  an  impossibility.  There- 
fore, when  market  -competition  seems  to  have  been  suppressed, 
we  should  inquire  what  has  become  of  the  forces  by  which  it 
was  generated.  We  should  inquire,  further,  to  what  degree 
market  competition  actually  is  suppressed  or  converted  into 
other  forms,  and  within  what  limits  combinations  can  hold 
together  and  act  effectively.  The  combination  equilibrium 
may  be,  at  best,  an  unstable  one.  The  economic  affairs  cf 
every  member  are  in  a  constant  ebb  and  flow.  The  relative 
advantages  of  members  as  possible  competitors  cannot  remain 
long  unaltered.  And  however  nearly  equal  they  may  be  at  any 
moment  in  economic  strength,  they  will  be  unequal  morally. 
Not  every  member  of  a  combination  goes  into  it  expecting  to 
break  the  agreement,  but  hoping  that  all  other  members  will 
keep  it  ;  ^  but  this  is  a  true  description  of  the  conduct  of  some. 
Different  producers  are  always  unequal  in  respect  of  that  larger 
fidelity  that  imparts  a  unique  value  to  a  commodity  through 
care  in  selecting  the  best  materials  and  the  most  careful  and 
trustworthy  workmen.  They  are  unequal  also  in  those  faculties 
by  which  production  is  adapted  to  changing  conditions.  The 
discerning  and  alert  secure  the  advantages  that  accrue  from  the 
first  production  of  superior  substitutes  for  articles  in  common 
use,  or  the  first  adoption  of  more  economical  methods.  Dis- 
turbances of  equilibrium  by  any  of  these  means  may  requicken 

^  J.  SchcEnhof,  The  Industrial  Situation,  p.  74. 


THE  PERSISTENCE  OF  COMPETITION:  23 

competition  within  the  combination.  Competition  may  be 
forced  upon  the  combination  from  without  by  the  accumulation 
of  outside  capital  seeking  employment.  The  latter  is  a  force 
that  nothing  can  overcome,  though  it  may  be  to  some  extent 
diverted.  It  is  the  organic  process  of  growth,  multiplying  cells 
in  the  vital  organism,  multiplying  individuals  in  society,  multi- 
tiplying  capital  in  financial  centres,  —  all  crowding  perpetually 
upon  the  existing  means  of  subsistence  and  profitable  occupa- 
tion, —  that  insures  the  permanence  of  competition  throughout 
the  whole  range  of  organic  phenomena. 

The  history  of  combinations  to  the  present  time  fully  verifies 
these  propositions.  Combinations  have  not  prevented  the  com- 
petitive investment  of  new  capital,  or  sustained  prices,  or  main- 
tained an  effective  discipline  among  their  own  members.  The 
general  decline  of  prices  has  gone  on  with  little  interruption 
since  1870  ;  that  is,  during  the  period  within  which  combinations 
have  had  their  phenomenal  growth.  Late  calculations  ^  give 
the  money  cost  of  the  average  daily  supply  of  food,  dry  goods, 
boots,  and  fuel,  for  one  adult,  as  43.53  cents  in  1870,  and  30 
cents  in  1885.  The  charge  for  moving  a  ton  of  freight  per  mile 
over  one  of  the  trunk  line  pool  roads  is  given  by  the  same  sta- 
tistician as  1.853  cents  in  1870,  and  .68  cents  in  1885.2  The 
industrial  depression  of  1883-84,  which  carried  nearly  all  prices 
to  a  much  lower  level  than  they  had  reached  in  the  previous 
depression  of  1878^79,  did  not  spare  the  goods  "controlled"  by 
combinations.  As  compared  with  the  lowest  prices  at  which 
they  were  quoted  previous  to  1882,  cut  nails  were  12  per  cent 
lower  in  1884,  and  steel  rails  39  per  cent  lower.^  The  nail 
industry  affords  a  good  illustration  of  the  inability  of  combina- 
tions to  withstand  the  competitive  action  of  new  capital.  In 
1883  the  Western  nail  association  made  several  attempts  to 
restrict  production  by  suspending  work.  Notwithstanding  this, 
the  number  of  mills  was  increased  during  the  year  from  ^^^ 
having  an  annual  capacity  of  8,500,000  kegs,  to  79,  with  an 

^  Those  of  Mr.  Edward  Atkinson  in  Bradstrcet's  of  December  18,  1SS6. 

2  The  Relative  Strength  and  Weakness  of  Nations,  The  Century,  Janur.r}-,  1SS7. 

8  BiaJstrecl's,  January  10,  18S5. 


24  POLITICAL  SCIENCE  QUARTERLY. 

annual  capacity  of  12,500,000  kegs,  and  half  of  the  increase 
was  in  the  western  district.^  In  1884  a  new  effort  was  made 
to  restrict  competition ;  but  almost  before  it  took  shape  the 
manufacture  of  nails  from  steel  began,  and  within  a  year  the 
steel  nail  mills  that  sprang  up  in  the  Wheeling  district,  not  to 
mention  others,  had  a  capacity  of  2,600,000  kegs  per  annum.^ 
Combinations  that  might  be  expected  to  be  strong  and  efficient, 
because  of  their  enjoyment  of  franchises  and  natural  monop- 
olies, are  all  the  while  breaking  because  of  internal  disagree- 
ments. No  longer  ago  than  the  autumn  of  1885  trunk  line 
railroad  business  was  completely  disorganized  because  the  roads 
could  not  agree  on  their  respective  allotments.  The  anthracite 
coal  combination,  formed  in  1873,  succeeded  in  controlling  the 
output  for  three  years.  Prices  were  gradually  forced  to  a  height 
that  the  market  would  not  bear,  and  stocks  accumulated,  in 
spite  of  the  restriction  of  production,  until  the  combination 
broke,  in  August,  1876,  and  500,000  tons  of  coal  were  sold  at 
auction.  Another  attempt,  made  in  1878,  was  broken  by  rate- 
cutting  by  the  Lehigh  Valley  company  and  the  contention  of 
the  Reading  company  for  a  larger  allotment.  A  third  combina- 
tion lasted  from  1879  ^^  1884,  when  its  efficiency  was  destroyed 
by  the  commercial  depression  and  the  increasing  resort  to 
bituminous  coal.^  A  fourth  arrangement,  made  in  1885,  has 
been  imperfectly  successful.  Of  all  the  industrial  combinations 
that  have  been  described  in  alarming  terms  in  the  popular 
reviews  and  anti-monopoly  organs,  probably  not  one-tenth  have 
continuously  and  effectively  limited  competition.  One  of  the 
most  perfectly  organized  and  most  talked  about  of  these  has 
been  the  wall-paper  combination,  and  its  fortunes  have  been 
peculiarly  instructive.  It  was  formed  in  1880,  and  made  a 
great  deal  of  money.  One  party  was  paid  ;^ 20,000  a  year  to 
cease  production.  A  scale  of  prices  was  established,  and  every 
member  was  assigned  his  proportion  of  the  total  production. 
The  penalty  for  underselling  was  a  forfeit  of  ^1000,  one-half 
to  go  to  the  informer.  Monthly  meetings  were  held,  at  which 
every  manufacturer  presented  a  detailed  statement  of  his  sales, 

1  Braditreet's,  May  lO,  1884.         2  /^/^^  July  18,  1S85.         3  Ibid.,  January  17,  1885. 


THE  PERSISTENCE  OF  COMPETITION:  25 

specifying  the  quality  and  price  of  every  roll  sold,  and  naming 
the  purchaser.  Then  the  executive  committee  equalized  the 
proceeds,  taking  from  those  that  had  oversold,  and  distributing 
among  those  that  had  not  sold  up  to  their  quota.  Yet,  not- 
withstanding these  elaborate  precautions,  competition  was  not 
prevented,  either  within  the  combination  or  from  without.  One 
member  has  chosen  to  pay  $10,000  a  year  in  forfeits  rather 
than  desist  from  underselling.  By  paying  factories  for  keeping 
idle,  the  combination  has  tempted  so  much  new  capital  into 
the  business  that  it  is  now  impossible  to  control  production 
or  prices. 

The  conditions  determining  the  area  within  which  combina- 
tions can  govern  market  competition,  divert  it  into  new  chan- 
nels, and  convert  it  into  new  forms,  are  to  be  found  in  certain 
natural  demarcations  in  the  industrial  structure  of  society. 
This  structure,  resting  on  the  basis  of  crude  materials,  which 
it  transforms,  adapts,  and  consumes,  is  constituted  by  the  segre- 
gation of  men  into  functional  groups,  corresponding  to  the  sub- 
divisions of  industrial  operations  and  the  broader  differences  of 
personal  qualification.  A  rude  attempt  to  indicate  this  structure 
is  made  in  the  diagram  upon  the  following  page.  The  subdivision 
of  operations  corresponds  to  the  evolution  of  general  utilities  into 
utilities  that  are  more  and  more  highly  specialized,  and  to  the 
division  and  redivision  of  materials  into  successive  sub-products,^ 
or,  more  strictly,  into  successive  series  of  sub-products,  as  the 
diagram  indicates.  Professor  Clark  has  shown  that  the  grada- 
tion of  sub-products  marks  off  the  producers  into  non-competing 
groups  of  an  entirely  different  kind  from  those  described  by 
Professor  Cairnes,  and  that  the  latter,  constituted  by  such  dif- 
ferences of  personal  acquirement  as  those  that  separate  artisans 
from  unskilled  laborers,  have  been  much  broken  down  by 
industrial  progress.  Yet  there  remains  a  grouping  by  differ- 
ences of  personal  qualification,  which  Professor  Cairnes  failed 
to  state  in  sufficiently  general  terms.  There  is  one  class  of 
workers  fit  only  for  automatic  manual  labor  ;  namely,  common 
laborers  and  machine  tenders.     Above  these  is  a  class  fit  to  be 

1  John  B.  Clark,  The  Philosophy  of  Wealth,  p.  112. 


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THE  PERSISTENCE  OF  COMPETITION.  27 

intrusted  with  some  responsibility  and  liberty  of  self-direction. 
It  is  impossible  for  those  in  the  first  class  to  compete  for  places 
with  those  in  the  second,  though  those  in  the  second  may 
become  competitors  with  those  in  the  first  in  times  of  indus- 
trial depression.  A  third  class  is  composed  of  the  automatic 
brain-workers,  such  as  book-keepers  ;  and  a  fourth  class,  of  the 
responsible  brain-workers,  including  the  superintendents  and 
directors.  The  basis  of  these  distinctions,  it  will  be  seen,  is  a 
much  broader  one  than  Professor  Cairncs  had  in  mind  as  the 
ground  of  his  grouping.  It  is  also  broader  than  the  differences 
of  moral  quality  that  the  adjective  responsible,  used  for  the 
lack  of  a  more  exact  word,  suggests.  It  is  that  broadest  psy- 
chological gradation,  which  Mr.  Herbert  Spencer  has  described 
as  consisting  of  differences  of  mental  mass  and  complexity.^ 
These  divisions  cut  transversely  across  those  described  by  Pro- 
fessor Clark,  and  constitute  sub-groups  within  his  groups.  It 
is,  further,  within  the  non-competing  groups  so  constituted  that 
combinations  are  formed  ;  and,  for  reasons  fully  set  forth  by 
Professor  Clark,  any  one  combination  is  usually  confined  within 
the  limits  of  a  single  group.  This  introduces  a  new  complica- 
tion, for  the  combination  is  a  radically  distinct  aggregate  from 
the  non-competing  group  within  which  it  exists.  While  the 
non-competing  group  consists  of  those  that  are  supposed  not 
to  compete  with  the  members  of  any  other  group,  but  to  com- 
pete freely  with  each  other,  the  combination  consists  of  those 
that  are  supposed  not  to  compete  at  all  with  each  other,  but  to 
compete  freely  with  those  outside  of  its  limits.  The  employer 
groups  and  combinations  are  further  complicated  by  the  central- 
ization there  of  capital. 

It  is  plain  that  these  demarcations  describe  groups  that  are 
very  unlike  in  composition  and  very  unequal  in  economic  condi- 
tion. Heterogeneity  of  composition  increases  as  we  go  back- 
ward in  the  scale  of  sub-products  toward  crude  materials,  be- 
cause the  dimensions  of  the  group  enlarge,  both  geographically 
and  in  respect  of  numbers.  The  group  producing  a  final  sub- 
product  is  necessarily  limited  in  size,  not  only  because  it  repre- 

^  See  the  article  on  The  Comparative  Psychology  of  Man,  Mind,  January,  1876. 


28  POLITICAL  SCIENCE  QUARTERLY. 

sents  a  minute  sub-division  of  a  more  general  product,  but 
because  the  quantity  of  a  highly  specialized  product  that  society 
can  consume  is  itself  limited  quite  narrowly.  The  market  is 
easily  oversupplied  and  demands  but  a  relatively  small  number 
of  producers.  It  follows  that  the  possibilities  of  combination 
are  slight  in  the  large  and  loose  groups  that  produce  the  pri- 
mary sub-products,  unless  their  operations  are  protected  by  nat- 
ural, or  legal,  especially  patent-right,  monopolies.  In  the  small 
and  compact  groups  producing  final  and  highly  specialized  sub- 
products,  the  possibilities  of  effective  combination  are  much 
greater.  Anthracite  coal  mining  is  a  primary  process,  but  it 
yields  to  combination  because  it  is  a  natural  monopoly  and 
easily  forms  illicit  alliances  with  the  railroads.  Steel  making  is 
a  secondary  process,  amenable  to  combination  because  protected 
by  patents ;  but  in  iron  making,  also  a  secondary  process,  com- 
bination is  maintained  very  imperfectly  and  with  great  difficulty. 
Besides  being  at  this  disadvantage  in  the  matter  of  combina- 
tion, the  primary  and  secondary  sub-product  groups  are  sub- 
jected to  the  further  strain  that  disturbances  of  the  economic 
equilibrium,  anywhere  in  the  industrial  structure,  distribute 
themselves  backward  toward  the  primary  groups.  Within  each 
group  the  distribution  is  downward,  through  the  sub-groups 
toward  the  lowest  —  the  automatic  laborers.  A  strike  that 
stops  the  production  of  a  sub-product  may  cause  the  suspension 
of  operations  and  the  bankruptcy  of  producers  in  the  sub-pro- 
duct group  beyond  it,  by  cutting  off  supplies  ;  but  the  liabilities 
of  the  advanced  group  will  be  due  chiefly  to  the  preceding 
groups,  and  the  bankrupted  employers  and  discharged  workmen 
will  force  their  way  downward  as  competitors  for  employment ; 
some  of  the  bankrupted  employers  obtaining  places  as  clerks, 
and  some  of  the  clerks  and  foremen  taking  work  as  machine 
tenders  and  laborers.  Furthermore,  as  Professor  Clark  has 
shown, 1  the  primary  and  secondary  groups  dispose  of  their  pro- 
ducts to  society  and  receive  their  recompense  only  through  the 
tertiary,  and  arc  therefore  much  at  the  mercy  of  any  conditions 
that  the  latter  may  impose. 

1  rhilosophy  of  Wealth,  p.  114. 


THE  PERSISTENCE  OF  COMPETITION:  29 

One  important  conclusion  is  now  in  sight.  When  a  product 
is  supplied  to  society  in  the  full  measure  of  the  social  needs, 
the  supply  of  correlative  needs  being  taken  into  consideration, 
the  further  investment  of  capital  and  labor  in  producing  that 
product  should  cease.  That  combinations  in  the  final  sub- 
product  series  may  often  restrict  competition  to  this  extent  is 
evident  from  the  fact  that  they  often  attempt  to  do  more. 
What,  then,  becomes  of  the  competitive  forces  —  where  do 
accumulating  capital  and  labor  find  employment  ?  We  are  con- 
fronted here  with  our  primary  question,  and  the  answer  to  it 
that  now  appears  is  one  full  of  meaning  for  progressive  socie- 
ties. Diversion  backward  into  the  primary  or  secondary  sub- 
product  groups  would  be  the  natural  course  for  labor  and  capital 
to  take  when  barred  out  from  the  final  groups,  but  for  the  facts 
just  noted  ;  vis.^  that  the  primary  and  secondary  groups  are 
dependent  on  the  tertiary  for  their  market,  and  are  obliged 
ultimately  to  bear  a  large  proportion  of  the  losses  of  the  entire 
industrial  system.  In  progressive  societies,  rich  in  inventive 
talent,  channels  of  less  resistance  will  be  opened  by  the  inven- 
tion or  discovery  of  new  utilities.  These  may  be  satisfactions 
of  wants  that  were  never  met  before,  or  they  may  be  superior 
substitutes  for  the  products  that  the  new  capital  was  deterred 
from  producing.  The  possibilities  in  the  latter  direction  are 
shown  by  the  present  production  from  steel  of  such  articles 
as  rails,  nails,  tacks,  and  wire,  that  formerly  were  made  only 
from  iron.  The  production  of  Bessemer  steel  ingots  during 
the  first  six  months  of  1885  was  40,000  tons  in  excess  of 
the  production  during  the  second  six  months  of  1884.  The 
production  of  steel  rails  was  70,000  tons  less.  The  differ- 
ence had  gone  into  other  manufactures  for  which  puddled  iron 
was  formerly  used.^  In  societies  that  have  learned  to  value 
quality  above  quantity  of  possessions,  other  channels  will  be 
found  in  the  almost  limitless  possibilities  of  bettering  the 
quality  of  commodities.  New  utilities  afford  opportunities  for 
capital  accumulating  outside  of  the  combinations  ;  the  improve- 
ment of  quality  gives  vent  to  competitive  energies  within  the 

1  Bradsireei^s,  August  i,  1SS5. 


30  POLITICAL  SCIENCE  QUARTERLY. 

combinations.  How  this  may  be,  is  well  illustrated  by  a  cer- 
tain brass  goods  combination  that  has  maintained  uniform 
prices  but  made  no  attempt  to  pool  production.  The  result 
has  been  precisely  that  higher  form  of  competition  that  John 
Ruskin  advocated  in  Unto  This  Last  as  the  only  one  that 
Christian  communities  should  tolerate.  The  members  of  the 
combination  have  rivalled  each  other  in  offering  the  most  per- 
fect goods  for  the  price,  and  their  products  have  attained  a 
degree  of  excellence  that  is  unique  in  American  mechanism. 

But  that  competition  shall  be  thus  diverted  into  new  and 
higher  forms,  it  is  not  necessary  that  combinations  shall  keep 
production  below  the  full  supply  of  the  social  needs,  or  main- 
tain prices  above  the  level  that  yields  average  returns  to  the 
labor  and  capital  employed.  Taking  one  series  of  years  with 
another,  neither  of  these  things  can  be  done.  While  the  area 
within  which  combinations  are  possible  is  determined  by  the 
industrial  structure,  the  degree  to  which  they  can  control  com- 
petition within  that  area  is  limited  by  the  strength  of  the  com- 
petitive forces.  These,  as  we  have  seen,  are  two  :  the  pressure 
of  accumulating  capital  upon  the  opportunities  of  employment, 
and  the  necessities  of  the  producers  already  in  the  field.  Dur- 
ing an  industrial  depression  the  active  competition  of  new 
capital  is  at  a  minimum,  but  the  established  producers  find  in- 
creasing difficulty  in  meeting  their  liabilities.  Self-defence 
becomes  the  ruling  motive.  Conversely,  when  demand  is  in- 
creasing and  prices  are  rising,  the  pressure  of  new  capital 
becomes  intense  ;  but,  the  struggle  to  meet  liabihties  having 
given  place  to  an  easy  accumulation  of  gains,  the  motive  for 
resisting  the  competition  of  new  capital  is  weak.  Combinations 
are  therefore,  in  their  historic  origin  and  in  practical  limitations, 
defensive  organizations,  for  mutual  protection  against  a  compe- 
tition that  has  become,  or  that  threatens  to  become,  predatory 
and  ruinous.  It  was  during  the  industrial  depression  of  1883, 
when  production  was  far  in  excess  of  the  demand,  that  the  cut 
nail  combination,  already  referred  to,  tried  to  restore  the  bal- 
ance by  suspending  operations.  It  was  when  the  prices  of 
their  product  had   declined  nearly   13  to    15    per  cent  within 


I 


THE  PERSISTENCE  OF  COMPETITION: 


31 


six  months,  that  the  writing  paper  manufacturers  effected 
a  combination  that  limited  production  temporarily,  but  that 
had  the  ultimate  effect,  as  one  of  its  members  assured  the 
writer,  of  "  building  new  mills."  When  the  Bessemer  steel  rail 
combination  made  its  compact  at  Long  Branch  in  August,  1885, 
to  limit  its  output  by  the  demand  for  consumption,  the  capacity 
of  the  works  represented  was  greatly  in  excess  of  the  demand, 
and  price-cutting  within  the  combination  had  been  going  on  for 
some  time.  The  market  improved,  and,  at  the  end  of  a  year 
and  a  half,  the  Bulletin  of  the  iron  and  steel  association 
announced  that  1,500,000  gross  tons  of  steel  rails  were  made 
in  1886,  against  950,471  in  1885.  And  this  improvement  of 
the  market,  enjoyed  by  other  branches  of  the  iron  and  steel 
industry  also,  instead  of  tempting  the  combinations  to  extort 
the  highest  possible  prices,  created  a  strong  feeling  on  the  part 
of  manufacturers  that  if  prices  were  permitted  to  go  higher,  it 
would  so  largely  increase  production  as  to  bring  about  a  reac- 
tion.^ These  are  but  examples  at  random  from  many  that  might 
be  cited.  If  stati-stics  of  the  extent  and  efficiency  of  combina- 
tions could  be  obtained,  the  curve  undoubtedly  would  rise  and 
fall  with  the  curve  of  industrial  depressions. 

The  degree  to  which  combinations  can  restrict  competition 
is  further  limited  in  more  specific  ways.  As  defensive  organi- 
zations they  cannot  sustain  their  weakest  members  indefinitely. 
All  business  is  in  a  sense  a  combination.  Commercial  credit 
and  personal  accommodation  enable  all  parties  in  the  great 
struggle  for  existence  fairly  to  try  their  powers.  By  such 
assistance  temporary  difficulties  are  overcome.  Combinations 
perform  a  like  service  in  a  negative  way  by  restraining  conduct 
that  is  mutually  injurious.  But  just  as  recurring  waves  of 
bankruptcy  from  time  to  time  sweep  off  the  competitors  that 
are  essentially  weak,  notwithstanding  the  help  that  they  may 
have  alternately  received  and  extended,  so  an  industrial  depres- 
sion of  unusual  severity  or  duration  forces  one  or  another  party 
to  unload  his  stocks  at  any  prices  that  he  can  get,  regardless  of 
combination  agreements,   and  consummates  the  extinction  of 

^  Bradstreefs,  December  25,  1 886. 


32  POLITICAL  SCIENCE  QUARTERLY. 

those  producers  whose  disadvantageous  situation  or  antiquated 
methods  make  their  cost  of  production  relatively  high.  On  the 
other  hand,  any  attempt  of  the  combination  to  become  an 
aggressive  agency  for  the  positive  enrichment  of  its  members 
is  subject  to  the  limitation,  that  the  conditions  that  might 
enable  a  combination  to  force  prices  to  an  unnatural  level  are 
the  very  ones  that  insure  the  most  disastrous  reaction  upon 
such  a  policy.  Other  things  being  equal,  new  capital  will  hesi- 
tate longest  about  entering  into  competition  with  established 
producers  in  those  industries  in  which  each  producer  must  have 
a  plant  that  is  costly  in  proportion  to  the  value  of  the  total 
product  of  all  producers.  But  the  combination  that  would  reap 
advantage  from  this  hesitancy  must  face  the  fact  that  it  is 
precisely  this  expensiveness  of  plant  that  entails  heavy  fixed 
charges,  —  which  must  be  met  at  whatever  sacrifice  of  profits, 
—  and  impels  competition  to  a  ruinous  extreme  if  more  capital 
is  tempted  into  the  business  than  the  normal  social  need  re- 
quires. A  short-sighted  and  grasping  policy  by  railroad  com- 
panies and  industrial  combinations  that  might,  by  a  liberal 
course,  have  kept  entire  markets  to  themselves,  has  resulted 
in  the  building  of  scores  of  railroads  and  hundreds  of  mills  for 
which  no  real  need  existed,  and  the  struggles  of  these  for  sub- 
sistence has  kept  rates  and  prices  below  the  dividend-paying 
level  for  years  together. 

Hence,  as  combinations  learn  their  unalterable  limitations  in 
"the  nature  of  things,"  they  must  adjust  prices  and  production, 
by  a  conscious  policy,  to  the  normal  basis  that  otherwise  will  be 
reached  in  a  more  wasteful  way.  They  must  permit  the  full 
satisfaction  of  normal  demands  and  allow  prices  to  gravitate  to 
an  equality  with  cost  of  production.  If  there  is  really  room  for 
new  plant,  and  new  capital  seeks  investment  in  new  plant,  the 
combination  by  standing  in  the  way  will  only  encourage  invest- 
ment in  excess.  If  a  member  of  the  combination,  or  a  new 
competitor,  is  able  through  the  adoption  of  new  machinery  or 
better  methods,  or  by  any  other  advantage  that  he  enjoys,  to 
make  his  goods  at  a  lower  cost  than  has  been  possible  before, 
and  therefore  to  put  them  on  the  market  at  a  lower  price  in  the 


THE  PERSISTENCE  OF  COMPET/T/OIV.  33 

hope  of  increasing  his  sales,  the  combination  must  let  him  make 
the  price  and  leave  other  members  to  conform  to  it  by  adopting 
his  methods.  Failing  to  do  this,  it  will  but  intensify  the  inevi- 
table struggle  for  survival  when  it  comes.  It  does  not  invalidate 
all  this  that  pools  sometimes  pay  would-be  competitors  for  ceas- 
ing production,  and  that  members  of  combinations  can  some- 
times afford  to  pay  forfeits  for  price-cutting.  These  are  but 
means  of  testing  the  probable  permanence  of  the  existing  rela- 
tions of  demand  and  supply.  If  the  undersupply  of  the  market 
that  tempts  new  capital  is  but  temporary,  the  price  paid  to  pre- 
vent it  from  entering  the  field  is  the  cost  of  warding  off  a  loss 
otherwise  certain.  If  the  undersupply  continues,  the  attempt 
to  buy  off  competition  will  only  stimulate  it.  If  forfeits  were 
graduated  according  to  the  degree  of  price-cutting  and  the 
volume  of  sales,  and  were  made  recoverable  by  the  party  paying 
them  if  he  demonstrated  his  ability  to  maintain  his  terms  per- 
manently, they  might  afford  a  nearly  perfect  test  of  the  price 
the  combination  must  prepare  to  accept,  and  a  nearly  perfect 
check  against  underselling  for  predatory  purposes.  Expendi- 
tures in  these  ways,  within  the  limits  dictated  by  prudence  and 
the  lessons  of  experience,  are  elements  in  the  cost  of  produc- 
tion under  modern  conditions  as  legitimate  as  insurance  pre- 
miums, and  it  is  not  impossible  that  combination  actuaries  will 
yet  reduce  the  principles  governing  combination  forfeits  to 
something  like  scientific  form. 

If  our  conclusions  so  far  are  sound,  can  the  affirmation  be 
maintained  that  market  competition  has  been  really  suppressed, 
or  that  the  essential  principles  of  Ricardian  economics  have 
been  overthrown  1  Ricardianism  never  contemplated  competi- 
tion in  the  production  of  additional  goods  for  a  market  already 
overstocked,  or  chronic  competition  in  selling  goods  below  the 
cost  of  production.  It  assumed  that  when  competition  had 
forced  the  price  of  any  commodity  down  to  the  sum  that  barely 
recompensed  labor  and  risk,  production  and  underbidding  would 
cease  and  labor  and  capital  would  find  other  employment.  When 
Ricardo  wrote,  this  assumption  was  warranted  by  commercial 
facts.     It  is  only  v.-hcn  production  is  carried  on  by  processes 


34  POLITICAL  SCIENCE  QUARTERLY. 

involving  heavy  fixed  charges  that  producers  are  impelled  to 
continue  operations  without  regard  to  the  state  of  the  market. 
It  is  only  when  large  reserves  of  capital  can  be  drawn  on  that  it 
is  possible  to  sell  below  cost,  on  a  great  scale,  for  the  sake  of 
winning  a  strategic  advantage.  In  Ricardo's  time  these  condi- 
tions did  not  exist  in  any  trade  or  manufacture.  If,  then,  com- 
binations deal  effectively  only  with  competition  below  the  sol- 
vency line,  are  not  the  essential  Ricardian  principles  as  true 
to-day  as  they  ever  were,  and  are  not  Mr.  Bagehot's  predictions 
verified  .-•  The  competition  that  wastes  resources  and  ruins  com- 
petitors is  an  abnormal  process  that  in  a  sound  industrial  system 
will  necessarily  create  reactions  against  itself.  Such  competition 
will  probably  encounter  an  increasingly  perfect  resistance.  The 
competition  that  forces  production  to  supply  fully  the  social 
demand,  and  forces  prices  down  to  an  equivalence  with  the  cost 
of  production,  is  normal.  Limitation  of  the  range  through  which 
the  series  of  competitive  acts  may  extend  but  increases  the 
amount  of  normal  competition,  since  by  preventing  the  wasting 
of  capital  it  increases  one  of  the  chief  competitive  forces. 

Franklin  H.  Giddings. 


PROFITS   UNDER   MODERN   CONDITIONS. 

"\'X  /"E  arc  drifting  toward  industrial  war  for  lack  of  mental 
*  ^  analysis.  Classes  in  society  arc  at  variance  over  a  ratio 
of  division,  and  have  no  clear  conception  of  the  thing  to  be 
divided.  If  the  profits  of  business  constitute  a  limitless  fund, 
they  furnish  a  corresponding  incentive  to  strife ;  aind  if  this  sum 
is  virtual  plunder,  if  it  consists  of  wealth  wrested  by  a  social 
arrangement  from  the  men  whose  labor  creates  it,  the  discon- 
tented class  ought  to  include  every  member  of  society,  and  will 
include  most  members.  It  needs  to  be  definitely  known  what 
profits  are,  and  who  earns  them  ;  and  again  how  large  they  are, 
and  who  actually  gets  them.  The  nature  of  the  prize  of  the 
social  contest  and  the  equities  of  the  case  need  to  be  made  far 
clearer  than  they  have  been. 

Adam  Smith's  "profits  of  stock"  included  the  general  re- 
turns of  the  capitalist-employer.  More  recent  writers  have 
recognized  that  this  person  performs  two  functions,  and  receives 
a  reward  in  each  capacity.  That  which  accrues  to  him  as  a 
capitalist  is  interest  ;  and  that  which  comes  to  him  as  an  em- 
ployer, or  business  manager,  is  known  as  cntrcprc7icnr  s  profit. 
This  element  is  computed  by  deducting  from  his  gross  returns 
the  interest  on  the  capital  that  he  uses. 

What  is  not  recognized  in  the  prevalent  theories  is  that  the 
entrepreneur  as  such  is  a  composite  person.  Besides  furnishing 
some  capital  he  still  performs  two  unlike  functions,  and  receives 
two  distinct  rewards.  Of  these  rewards  one  is  constant  and  the 
other  intermittent ;  and  it  is  this  latter  element  that,  as  vaguely 
conceived,  constitutes  the  incentive  to  social  strife.  It  is  the 
fact  of  confounding  the  two  functions  and  merging  the  rewards 
attaching  to  them  that  has  placed  economic  writers  where  it 
has  been  impossible  either  to  make  consistent  theories  or  to 
comprehend  the  developments  of  modern  business. 


36  POLITICAL  SCIENCE  QUARTERLY. 

An  entrepreneur  is,  first,  an  industrial  organizer ;  he  directs 
the  productive  energies  of  other  persons.  If  he  be  a  manu- 
facturer he  divides  and  subdivides  the  labor  of  making  a  prod- 
uct, and  assigns  to  each  workman  the  part  of  the  process  to 
which  he  is  adapted.  The  thing  to  be  accomplished  is  pre- 
scribed ;  there  is  a  certain  article  to  be  produced,  and  there  is 
an  accepted  manner  of  producing  it ;  and  the  routine  function 
which  first  falls  to  the  employer  consists  in  directing  the  opera- 
tion in  its  execution.  He  guards  against  wastes,  impels  workers 
to  effective  effort,  and  co-ordinates  their  labors.  By  his  direc- 
tion the  work  of  many  individuals  is  brought  into  organic  unity. 
He  is  the  brain  of  a  little  social  organism  ;  he  does  its  executive 
planning,  and  communicates  to  the  muscles  the  motive  impulses 
that  set  them  at  work  and  control  their  action. 

In  this  capacity  the  employer  is  the  most  important  part  of 
W^Q.  personnel  of  the  shop.  He  is  a  directive  laborer.  The  out- 
come of  his  effort  is  a  certain  mechanical  result,  a  transforma- 
tion of  matter.  Directive  labor,  muscular  labor  and  machines 
together  create  "form  utilities";  they  transform  iron  into  im- 
plements, wool  into  cloth,  etc. ;  and  in  these  changes  of  form 
lies  the  value  that  they  jointly  bring  into  existence.  Employer 
and  workman  are  thus  far  laborers  together  ;  what  they  get  for 
their  efforts  is,  in  the  broad  sense  of  the  term,  wages  ;  and  the 
employer's  part  is  distinctively  the  wage  of  directive  labor. 

In  addition  to  this  there  comes  to  an  employer  a  return  hav- 
ing a  wholly  different  origin  and  nature ;  it  is  essentially  mer- 
cantile. An  employer  buys,  sells  and  gets  gain  like  any  dealer 
on  the  street.  The  business  operations  of  a  woolen  manufac- 
turer do  not  begin  with  wool  in  the  sorting  room,  and  end  with 
goods  in  the  storehouse.  He  must  obtain  the  wool  from  dealers, 
and  must  hand  the  goods  over  to  purchasers.  The  mechanical 
part  of  his  business  is  completed  at  the  mill,  and  by  the  work- 
ing organism  of  which  he  is  the  head  ;  the  mercantile  part  ex- 
tends into  the  world,  and  brings  him  into  connection  with  other 
producing  organisms.  In  this  particular  excl^anging  function 
the  workmen  have  no  part  ;  the  employer  only  is  recognized  in 
the  market  as  the  buyer  of  materials  and  the  seller  of  goods. 


PROFITS  UNDER  MODERN  CONDITIONS.  37 

The  buying  of  raw  materials,  however,  does  not  end  the  em- 
ployer's function  as  a  purchaser ;  there  is  something  more  to  be 
acquired  if  he  is  to  become  the  valid  owner  of  the  product. 
Into  the  finished  goods  there  enter  other  elements  than  raw 
materials,  and  these  must  be  in  part  acquired  by  purchase. 
Within  the  mill  itself  there  are  titles  to  be  transferred.  Day 
by  day,  hour  by  hour,  as  the  manufacturing  goes  on,  new  utili- 
ties come  into  existence.  Every  turn  of  the  engine  results  in 
more  cloth,  more  yarn,  more  carded  wool,  etc.  The  utilities 
thus  created  have  definite  values  ;  unfinished  goods  may  not  be 
immediately  salable,  but  the  employer  would  know  how  to  rate 
them  were  he  to  take  an  account  of  stock.  Every  step  in  the 
process  that  brings  them  nearer  to  the  condition  in  which  they 
can  be  placed  upon  the  market  adds  something  to  the  value  of 
the  crude  materials  with  which  the  process  began.  These  in- 
crements of  utility  are,  as  we  have  said,  jointly  created  by  three 
agencies  :  directive  labor,  muscular  labor  and  machines.  This 
determines  their  ownership  :  they  belong,  in  undivided  shares, 
to  the  director,  the  workmen  and  the  furnisher  of  machines,  or 
the  capitalist. 

Now  the  essential  fact  is  that  the  employer  buys  out  his 
partners  in  the  productive  operation.  He  pays  for  the  share  of 
the  workmen  in  wages  and  for  that  of  the  capitalist  in  interest, 
and  acquires  thereby  a  title  to  the  utilities  created  in  the  mill. 
As  the  raw  material  is  his  from  the  outset,  he  ends  by  becoming 
the  owner  of  every  element  of  the  product.  In  his  own  name 
he  may  place  the  goods  on  the  market  and  get  what  he  can  for 
them. 

The  function  of  the  entrepreneur  as  such  consists  therefore 
in  two  operations,  the  one  mechanical  and  the  other  mercan- 
tile :  he  directs  a  productive  process,  and  he  buys  the  elements 
that  enter  into  the  product  and  sells  them  collectively  in  the 
product  itself.  In  the  one  capacity  he  is  a  laborer  and  receives 
a  higher  variety  of  wages ;  in  the  other  capacity  he  is  a  mer- 
chant, and  receives  a  margin  of  difference  between  what  he 
pays  and  what  he  gets.     The  finished  goods  are  supposed  to 


38  POLITICAL  SCIENCE  QUARTERLY. 

bring  in  the  market  more  than  the  cost  of  all  the  elements 
that  compose  them.^ 

In  a  complete  study  of  profits  it  needs  to  be  noticed  that  the 
mercantile  part  of  the  employer's  function  requires  both  labor 
and  capital.  He  must  spend  time  in  obtaining  materials,  in 
making  contracts  with  workmen  and  capitalists,  and  in  disposing 
of  goods.  Here  there  is  a  need  of  labor ;  and  there  is  a  neces- 
sity for  capital  of  the  circulating  kind  in  the  holding  of  goods 
until  they  can  be  sold  and  paid  for.  Mercantile  labor  as  well  as 
mechanical  is  entitled  to  wages,  and  circulating  capital  as  well 
as  fixed  is  entitled  to  interest.  A  mercantile  wage  constitutes 
the  second  part  of  the  general  wage  of  business  management ; 
and  an  item  of  interest  on  circulating  capital  constitutes  a  part 
of  the  general  claim  of  capital. 

The  labor  involved  in  buying  and  selling  is  only  incidental  to 
the  mercantile  function.  It  is  not  the  essence  of  it ;  that  lies 
in  the  mere  acquiring  and  surrendering  of  ownership.  It  is 
because  the  elements  that  enter  into  a  product  come  succes- 
sively into  an  employer's  possession,  and  then  pass  collectively 
out  of  it,  that  he  can  look  for  a  return  'over  and  above  the  wages 
of  every  kind  of  labor  and  the  interest  of  every  kind  of  capital 
involved  in  the  business  operation.  We  must  group  in  one  item 
all  that  comes  to  an  employer  in  compensation  for  effort  of  any 
kind,  and  in  another  all  that  goes  to  compensate  the  capitalist. 

The  general  wage  of  business  management  constitutes  one  of 
the  preferred  claims  on  the  returns  of  business ;  it  must  be 
deducted  from  them  before  final  profits  can  be  computed.  Ordi- 
nary wages  constitute  another  preferred  claim,  interest  a  third 
and  the  cost  of  materials  a  fourth.  If,  to  avoid  intricacy,  we 
group  taxes,  all  forms  of  insurance  and  incidental  expenses  as  a 
fifth  claim  the  sum  of  these  five  amounts  will  represent  the 
total  cost  of  acquiring  the  title  to  a  product  In  selling  the 
product  for  more  than  this  sum  total  lies  the  employer's  chance 
of  ultimate  gain.  Pure  profit  is  the  return  of  simple  ownership. 
It  is  free  from  all  admixture  of  wages  and  of  interest.    It  accrues 

^  This  analysis  of  gross  profits  was  published  in    Work  and  Wages  for   March, 
1887,  in  an  article  by  the  writer  of  the  present  paper. 


PROFITS  UNDER  MODERN  CONDITIONS.  39 

to  him  who  simply  extends  the  aegis  of  his  civil  rights  over  the 
elements  of  a  product,  and  then  withdraws  it  in  order  that  the 
product  may  pass  into  other  hands.  The  C7itrcpreneiir  ox  assiimer 
is  he  who  takes  upon  himself  the  responsibility  of  ownership. 

That  the  capitalist,  the  manager,  and  the  owner  of  the  prod- 
uct may  at  times  be  one  and  the  same  person  does  not  affect  the 
analysis ;  the  three  functions  are  distinct,  and  the  rewards 
attaching  to  them  are  equally  so.  The  growth  of  corporations 
tends  in  a  practical  way  to  separate  these  functions.  Capitalists 
are  here  a  body  of  stockholders,  bondholders  and  business  cred- 
itors ;  managers  are  a  body  of  salaried  officials ;  while  entre- 
preneurs, in  the  limited  sense  of  the  term,  are  the  stockholders. 
Pure  profit  resides  in  the  portion  of  the  dividends  that  is  in 
excess  of  current  interest  on  the  paid-up  capital. 

Pure  profit  is  the  prize  that  lures  men  into  business  ventures. 
On  this  element  in  the  returns  of  industry  are  centered  the 
larger  expectations  of  working  men.  There  is  no  other  element 
from  which  they  can  draw  a  considerable  dividend  by  a  change 
in  distribution.  Though  interest  were  reduced  by  a  half,  and 
managers'  salaries  curtailed  in  the  same  proportion,  the  sum 
thus  saved  would,  as  divided  among  workmen,  raise  wages  only 
by  a  small  fraction.  The  elastic  margin  of  pure  mercantile  profit 
appears  to  the  undiscerning  to  be  a  more  promising  source  of 
gain.  It  is  important  to  know  how  large,  under  modern  con- 
ditions, this  sum  is  becoming. 

The  elements  in  the  cost  of  a  product  are  primarily  deter- 
mined by  conditions  over  which  the  employer  has  no  control. 
Wages  are  fixed  in  the  general  market  for  labor ;  there  is  not 
one  rate  for  a  particular  manufacturer  and  another  for  his  rival 
in  the  trade,  nor  are  there  considerable  differences  between  the 
rates  prevailing  in  most  of  the  different  trades.  Labor  passes 
freely  from  one  establishment  to  another,  and  even  from  one 
industrial  group  to  another,  and  the  permanent  tendency  of 
wages  is  toward  uniformity.  This  large  element  in  the  cost  of 
products  is  fixed  by  uncontrollable  movements  in  a  universal 
market. 

Interest  is  determined  by  equally  general  conditions,  and  is 


40  POLITICAL  SCIENCE  QUARTERLY. 

uniform  to  all  borrowers  who  furnish  equal  guaranties  for  the 
certainty  and  promptness  of  their  payments.  The  cost  of  raw 
materials  is  determined  in  a  market  that  is  somewhat  more 
limited  ;  it  is  gauged  by  the  transactions  that  take  place  be- 
tween the  industrial  group  that  produces  it  and  the  several 
groups  that  use  it.  This  market  is  broad  enough  to  be  beyond 
individual  control. 

The  cost  of  the  labor  of  management  is  subject  to  more  dis- 
turbing influences  than  almost  any  other  economic  elem.ent  ; 
and  general  statements  concerning  this  item  of  outlay  need  to 
be  made  with  adequate  reservations.  Personal  relations  may 
make  a  particular  salary  abnormal.  The  principle  that  tends 
to  determine  the  wage  of  business  management  may  be  formu- 
lated and,  with  due  caution,  applied ;  it  is  fixed  in  a  general 
market  for  labor  of  a  given  intellectual  and  moral  quality. 
Tried  ability  and  integrity  demand  high  rates  of  pay,  but  gravi- 
tate toward  any  honorable  occupation  that  offers  them  ;  and 
the  general  tendency  here  as  elsewhere  is  toward  a  certain 
uniformity.  Rates  of  insurance  and  taxation  are  governed  by 
impartial  rules.  The  elements  that  constitute  the  cost  of  a 
product  to  the  man  who  is  to  own  and  sell  it  are  fixed  by 
conditions  which  he  cannot  change. 

His  returns  are  equally  beyond  his  control.  The  price  of  his 
product  is  adjusted  in  the  open  market  by  transactions  between 
the  group  to  which  he  belongs  and  the  various  groups  that  con- 
tain his  custcfmers.  The  adjustment  is  similar  to  that  which 
governs  the  price  of  raw  materials.  Pure  profit  is  the  differ- 
ence between  this  uncontrollable  amount  and  the  sum  of  the 
equally  uncontrollable  amounts  disbursed.  The  reward  of  the 
entrepreneur  in  his  capacity  as  owner  of  a  product  comes  to  him, 
as  rain  from  the  clouds,  through  the  action  of  forces  lying  be- 
yond the  range  of  his  dominant  influence.  He  has  nothing  to 
do  but  to  receive  it.  He  must  accept  what  comes  into  his 
treasury,  and  submit  to  what  goes  out  of  it ;  the  difference, 
which  is  pure  profit  or  loss,  is  fixed  without  appeal.^ 

^  Gains  etTected  by  the  illegitimate  manipulation  of  values,  such  as  is  sometimes 
practiced  in  Wall  Street  and  elsewhere,  do  not  fall  within  the  scope  of  this  discussion. 


PROFITS  UNDER  MODERN  CONDITIONS.  41 

In  his  other  capacity,  that  of  manager,  the  entrepreneur  is  not 
the  helpless  creature  of  fate.  His  fortune  is  largely  in  his  own 
hands.  Moreover  the  fortune  of  the  owner  is,  in  a  negative 
way,  entrusted  to  the  manager,  who  can  always  mar  it,  though 
he  cannot  always  make  it.  In  a  study  of  profits  it  needs  to  be 
assumed  that  the  shop  is  running  under  competent  direction  ; 
otherwise,  under  modern  conditions,  it  will  quickly  pass  from 
the  industrial  field.  Materials  must  be  well  selected,  the  work- 
ing force  well  handled,  and  the  goods  rapidly  and  safely  mar- 
keted, or  the  pure  profit  will  become  a  negative  quantity,  and 
the  business  will  be  terminated.  There  are  transient  condi- 
tions in  which  mediocrity  may  for  some  time  hold  its  place  ; 
but  the  sword  is  over  its  head  from  the  outset,  and  will  fall  in 
due  time. 

The  modern  struggle  for  existence  means  the  survival  of  the 
fittest  type  of  industrial  establishment.  Elements  that  deter- 
mine the  question  of  fitness  are  location,  working  method  and 
managing  efficiency.  The  shop  that  is  unfavorably  located 
yields  its  business  to  others ;  and  industries  tend  automatically 
to  concentrate  in  places  where  they  can  thrive.  The  mill  that 
uses  an  antiquated  process  must  change  it  or  stop  working ;  and 
industries  tend  towards  uniform  mechanical  excellence.  The 
establishment  that  is  badly  conducted  must  change  its  manage- 
ment or  fail ;  and  business  tends  to  concentrate  in  the  hands  of 
those  who  conduct  it  with  the  greatest  energy  and  wisdom. 

The  centralization  of  industry  gives  a  special  impulse  to  the 
tendency  to  eliminate  mediocre  management ;  it  permits  a  divis- 
ion of  the  directive  function.  There  are  diversities  of  gifts  in 
the  business  world  ;  the  good  mechanic  may  be  a  bad  financier, 
salesman,  etc.  The  great  establishment  places  in  every  respon- 
sible position  a  man  specially  adapted  to  it.  The  entrepreneur 
of  a  highly  developed  establishment  is  a  collective  personality. 
The  shop  that  is  under  individual  direction  is  no  longer  typical ; 
and  if  we  continue  to  speak  in  the  singular  number  of  the  man- 
ager, the  owner,  and  the  capitalist,  it  is  to  keep  in  mind  the 
essential  unity  of  the  several  groups  that  the  terms  must  really 
designate.     In  clear  cut  distinctness  of  function,  it  is  as  though 


42  POLITICAL  SCIENCE  QUARTERLY. 

they  were  individuals  ;  in  efficiency,  they  greatly  surpass  them, 
and  tend  to  supplant  them  in  the  industrial  field.  Modern 
business  demands  and  secures  an  aggregation  of  forces  in  every 
department.  Groups  that  have  supplanted  individual  managers 
continue  the  competition  among  themselves,  and  the  entrepre- 
neur that  tends  to  ultimately  survive  is  a  body  of  men,  each  one 
of  whom  has  shown  special  capacity  in  his  department.  The 
typical  modern  manager  is  an  organization  that  is  perfect  in 
each  separate  part. 

In  formulating  the  principle  that  gauges  the  returns  of  a 
particular  manager  at  a  given  time,  the  analogies  between  rent 
and  profit  are  instructive.  They  have  been  well  utilized  by  one 
of  the  most  eminent  of  living  economists,  General  Francis  A. 
Walker.  Having  now  in  view  a  different  end,  that  of  establish- 
ing a  law  of  development,  and  of  determining  the  rate  toward 
which  the  different  elements  in  general  profits  are  tending,  I 
find  it  possible  to  derive  complementary  lessons  from  the  con- 
trasts presented  by  the  Ricardian  principle  of  rent  and  the 
principle  that  asserts  itself  in  the  management  of  modern 
business. 

The  area  of  cultivation  in  agriculture  is  governed  by  a  law  of 
extension  ;  the  range  of  managing  ability  is  subject  to  a  prin- 
ciple of  elimination  and  contraction.  According  to  accepted 
formulas  the  best  land  is  first  used,  and  cultivation  then  extends 
to  poorer  and  poorer  qualities.  The  process  begins  with  one 
grade  and  ends  with  many.  In  general  business,  various 
degrees  of  managing  ability  come  early  into  the  field  ;  compe- 
tition eliminates  one  after  another,  till  the  best  only  is  sure  of 
permanent  survival.  With  one  qualification,  hereafter  to  be 
stated,  the  process  begins  with  many  grades  and  ends,  if  it  is 
ever  completed,  with  one.  The  difference  in  productiveness 
between  the  best  land  and  the  worst  is  increasing  ;  that  between 
the  best  management  and  the  worst  that  we  need  to  take 
account  of  is  diminishing.  The  rent  of  lands  varies  as  their 
qualities,  from  nothing  to  an  increasingly  large  sum  ;  the  wages 
of  managers  tend,  like  their  business  qualities,  in  the  direction 
of  uniformity. 


I 


PROFITS  UNDER  MODERN  CONDITIONS.  43 

Agriculture  is  dominated  by  a  law  of  diminishing  returns  ; 
and  general  business  by  a  law  of  increasing  returns.  Double 
the  labor  and  capital  expended  on  an  acre  of  ground  and  you  do 
not  double  the  crop  ;  double  the  labor  and  capital  entrusted  to 
an  efficient  manager  and  you  more  than  double  the  product. 
The  concentration  of  labor  and  capital  renders  more  costly  the 
products  of  agriculture  ;  and  the  same  influence  cheapens  those 
of  general  business. 

It  follows  that  the  demand  for  agricultural  products  tends  to 
outrun  the  supply  ;  while  the  supply  of  manufactured  commod- 
ities tends  to  outrun  the  demand.  In  the  one  case  increasing 
population  is  the  primary  fact ;  and  this  calls  for  more  food,  etc., 
in  spite  of  the  greater  cost  at  which  it  is  obtained.  In  the  other 
case  cheapened  production  is  the  primary  fact ;  and  this  influence 
thrusts  an  increasing  product  upon  the  market,  notwithstanding 
the  diminished  price  at  which  it  must  be  sold.  The  output  of 
great  manufacturing  industries  is  disposed  of  by  a  process  that 
tends  continually  to  take  on  somewhat  of  the  character  of  a 
forced  sale.  The  normal  condition  of  many  industries  is  one 
that,  from  a  business  man's  point  of  view,  must  be  termed  over- 
production ;  it  is  the  condition  in  which  more  is  produced  at 
each  particular  interval  than  can  be  sold  at  prices  that  through 
the  preceding  interval  prevailed.  It  is  this  final  test  of  over- 
supply  that  weak  producers  cannot  endure. 

The  struggle  for  existence  is  pending,  and  industrial  groups 
show  various  degrees  of  approach  to  the  consummation  to  which 
it  leads.  In  some  groups  the  surviving  establishments  are 
already  in  a  state  of  high  and  nearly  uniform  efficiency ;  while 
in  others  they  still  differ  considerably  in  this  respect.  There 
is,  moreover,  scattered  over  the  industrial  field,  an  experiment- 
ing class,  whose  presence  renders  necessary  the  qualification  in 
the  statement  of  general  laws  to  which  reference  has  already 
been  made.  These  men  are  testing  their  capacity  to  survive  in 
the  contest  with  men  of  tried  ability.  A  few  win  permanent 
places  ;  the  remainder  pass  from  the  field  ;  but  their  transient 
presence  disguises  the  operation  of  the  law  of  survival.  They 
must  be  left  out  of  account  if  we  are  to  know  how  far  the  devcl- 


44  POLITICAL  SCIENCE  QUARTERLY. 

opment  has  proceeded,  and  what  grade  of  managing  efficiency 
has  a  chance  of  permanent  continuance.  Any  group  may  have 
its  experimenters  who  are  of  greatly  inferior  quaHty.  The  old 
employer  who  is  about  to  be  crowded  from  the  field  marks  the 
margin  of  survival ;  better  managers  may  remain  in  the  field, 
while  worse  ones  will  be  cast  out. 

The  merging  of  the  functions  of  owner  and  manager  intro- 
duces another  element  of  variation,  and  makes  farther  care 
necessary  in  practically  testing  the  theoretical  rule.  A  man 
who,  besides  pure  profit,  receives  a  salary  and  perhaps  an  ele- 
ment of  interest  may  not  take  leave  of  the  competitive  field 
when,  according  to  simple  theory,  he  ought  to  do  so.  After 
profits  and  interest  have  vanished  he  may  live  on  a  salary,  and 
may  struggle  against  fate  till  his  capital  is  curtailed.  Through 
all  variations  in  its  application,  the  law  of  survival  holds  true, 
and  places  in  control  of  the  material  fortunes  of  humanity  a 
class  of  managing  agents  who  are  diminishing  in  number  and 
improving  in  quality.  They  are  in  fact  agents  and  not  princi- 
pals ;  it  is  the  interests  of  others  that  are  primarily  entrusted 
to  their  keeping ;  for  though  their  wages  become  relatively 
high,  they  are  kept  within  sharp  limitations,  while  the  largest 
fruit  of  their  invaluable  labor  passes  by  an  irresistible  law  to 
society. 

Wages  of  management  are  radically  affected  by  the  division 
of  directive  labor.  The  typical  modern  manager,  as  already 
noticed,  is  a  collective  personality.  Were  the  rare  qualities 
that  are  needed  for  conducting  a  great  enterprise  combined  in 
one  man  he  could  command  a  monopoly  wage.  It  would  be 
impossible  to  replace  him,  in  case  he  were  to  leave  his  employ- 
ment ;  and  the  limit  of  his  salary  would  be  set  only  by  the 
paying  ability  of  the  capitalist-owner.  It  is  possible  to  replace 
any  member  of  a  managing  organization,  and  the  salaries  of  the 
members  cannot  well  be  excessive.  There  is  a  graded  list  of 
candidates  for  the  different  positions.  Counting  rooms  are  full 
of  potential  presidents,  secretaries  and  treasurers  ;  shops  are 
full  of  potential  superintendents ;  and  though  some  of  the  can- 
didates may  be,  by  a  certain  margin  of  difference,  inferior  to 


PROFITS  UNDER  MODERN  CONDITIONS.  45 

the  men  now  occupying  the  higher  places,  the  fact  of  their 
presence  places  a  definite  check  on  the  salaries  that  are  paid. 
Experience  in  work  of  the  higher  sort  would  reduce  the  differ- 
ence in  quality  between  the  men  in  the  better  positions  and  the 
candidates  for  them.  The  tried  man  has  the  preference  ;  but 
his  tenure  of  office  depends  in  a  measure  on  his  success  in  what 
may  be  termed  a  continuous  competitive  examination.  There 
are  complications  arising  from  the  fact  that  personal  relations 
to  capitalists  are  not  without  a  large  influence  on  the  awarding 
of  the  prizes  in  this  contest ;  but  available  candidates  are  always 
numerous  enough  to  place  a  definite  limit  beyond  which  the 
wages  of  directive  labor  may  not  rise.  This  element  of  an 
employer's  returns  is  determined  by  active  competition  in  a 
general  market  for  labor  of  a  certain  intrinsic  quality. 

There  remains  to  be  determined  the  amount  of  pure  mercan- 
tile profit.  This  is  the  final  element  in  the  analysis  of  the  gross 
returns  of  business,  and  if  there  arc  principles  governing  it, 
then  the  division  of  social  wealth  is  at  least  a  scientific  process. 
Pure  profit  is  the  seemingly  uncertain  quantity  which  lures  men 
into  business,  and  which  figures  in  the  minds  of  the  discon- 
tented as  the  prize  of  agitation.  Here,  if  anywhere,  lies  the 
spring  that  fills  the  pools  of  unearned  wealth. 

Pure  profit  is  a  vanishing  sum.  The  a  priori  laws  of  political 
economy  demand  the  annihilation  of  it,  and  it  submits  to  the 
decree.  In  the  Ricardian  sense  of  the  term  the  natural  amount 
of  this  ultimate  profit  is  nil.  It  is  a  positive  quantity  where 
the  competitive  law  has  not  fully  asserted  itself,  and  where, 
\vithin  the  sphere  of  its  control,  it  is  checked  by  temporary  in- 
fluences. Economic  orthodo.xy  concedes  to  this  element  no 
theoretical  existence  ;  and  where  the  assumptions  of  this  sys- 
tem concerning  competition  are  realized,  the  practice  of  the 
world  becomes  orthodox  ;  pure  profit  actually  disappears.  This 
is  an  unanticipated  vindication  of  logic.  Ricardo  did  not  pre- 
dict such  an  outcome,  nor  did  he  so  far  analyze  the  returns  of 
industry  as  to  distinguish  the  element  that  is  subject  to  the  law 
of  annihilation.  Yet  his  system  involved  the  principle,  and  the 
conformity  to  it  of  actual  practice  is  the  latter-day  triumph  of 
Ricardianism. 


46  POLITICAL  SCIENCE  QUARTERLY. 

With  capital  seeking  investment  at  the  prevalent  rate  of  in- 
terest, with  directive  labor  seeking  employment  at  the  high  rate 
of  wages  that  its  quality  demands,  can  they  fail  to  find  each 
other  out,  if  by  union  they  can  each  secure  a  premium  ?  Can 
anvthing  prevent  them  from  simultaneously  migrating  to  the 
point  where,  besides  their  wages  and  interest,  they  can  com- 
mand an  ulterior  gain  ?  Nothing  can  do  so  in  theory.  Ordinary 
risk  is  not  a  barrier,  since  that  is  counterbalanced  by  the  item 
of  insurance  which  in  our  analysis  we  have  recognized.  Eco- 
nomic formulas  call  for  a  prompt  migration  of  labor  and  capital 
to  the  point  of  special  inducement ;  and  the  formulas  are  justi- 
fied. A  subject  of  common  remark  is  the  reckless  promptness 
with  which  the  movement  actually  takes  place.  An  employer 
who  is  getting  more  than  interest  and  wages  of  direction  is  in- 
terested to  enlarge  his  product  by  drawing  on  the  loan  fund  of 
the  market ;  and  a  capitalist  who  by  engaging  in  industry  can 
secure  more  than  interest  and  wages  of  direction,  is  interested 
to  create  a  new  establishment  by  drawing  on  the  market  for 
directive  labor.  By  enlargements  from  within  and  accessions 
from  without  the  productive  plant  is  enlarged,  the  product  in- 
creased and  the  price  of  it  reduced  to  the  point  at  which  capital 
and  labor  of  every  kind  receive  only  their  normal  reward. 
The  point  of  stable  equilibrium  is  that  at  which  a  capitalist- 
employer  realizes  neither  more  nor  less  than  interest  on  his 
capital  and  a  salary  for  his  time. 

Stable  equilibrium  is  not  usually  rest.  Influences  may  dis- 
turb the  adjustment,  and  in  this  instance  they  do  so  as  regu- 
larly as  it  is  effected.  It  is  not  to  be  anticipated  that  the 
myriad  of  different  industries  that  occupy  the  economic  field 
will  ever  simultaneously  reach  their  natural  level  of  productive- 
ness. Pure  profits  will  always  be  found  at  numerous  points, 
though  at  no  one  of  them  will  they  prove  permanent.  If  we 
continue  to  watch  a  particular  industry  we  shall  see  pure  profit 
appearing,  as  the  result  of  a  disturbing  influence,  and  then 
slowly  vanishing,  as  competition  reasserts  its  control.  If  we 
watch  the  entire  industrial  field  we  shall  see  pure  profit  appear- 
ing, now  here  and  now  there,  shifting  forever  its  place  in  the 
field,  but  never  absent  from  it. 


PROFITS  UNDER  MODERN  CONDITIONS.  47 

One  influence  which  periodically  raises  the  returns  of  busi- 
ness above  their  natural  limit  is  the  rhythmical  movement  of 
trade,  or  the  fluctuation  from  under-consumption  to  over-con- 
sumption that  results  from  internal  changes  in  the  economic 
system.  The  period  of  active  demand  yields  profits  where, 
other  conditions  remaining  the  same,  that  of  slackened  demand 
entails  losses.  The  two  results  should  be  made  to  offset  each 
other  by  averaging  the  returns  of  a  considerable  number  of 
years,  if  the  true  status  of  an  industry  is  to  be  ascertained. 
When,  in  a  long  interval,  the  pure  profits  just  balance  the  losses 
the  natural  rate  of  returns  may  be  considered  as  maintained. 

The  settlement  of  a  fertile  continent  is  a  disturbing  influence 
that  may  extend  through  a  hundred  years,  and  this  period  must 
then  be  regarded  as  a  prolonged  interval  of  adjustment.  Com- 
petitive law  cannot  fully  vindicate  itself  while  soil  exploitation 
—  not  agriculture  —  is  pouring  treasures  into  every  one's  lap. 
Yet  in  the  end  the  slow  moving  law  will  assert  its  power.  The 
opening  of  America  to  settlement  created  an  originally  high 
level  of  general  profits,  from  which  level  competition  has  re- 
duced them  with  varying  rates  of  rapidity.  Some  localities  and 
some  industries  still  realize  abnormal  gains  from  this  source. 

There  is  another  disturbing  influence  which  gives  a  promise 
of  constantly  recurring  as  long  as  the  economic  system  con- 
tinues. It  acts  intermittently,  and  on  particular  industries, 
but  is  always  present  at  a  thousand  different  points  in  the  gen- 
eral field.  It  is  the  legitimate  creator  of  pure  mercantile  profit ; 
and  though  we  call  its  action  a  disturbance,  since  it  counteracts 
the  action  of  competitive  law,  yet  this  influence  is  as  natural  as 
the  force  that  it  abrogates.  It  affords  a  guaranty  for  continued 
civilization.  It  is  the  result  of  a  unique  human  service,  that  is 
the  most  far-reaching  in  its  effects  of  any  that  an  industrial 
worker  can  render.  This  is  the  making  and  applying  of  inven- 
tions. While  the  rest  of  humanity  are  working,  an  elect  few 
are  searching.  The  results  of  their  search  come  partially  and 
temporarily  to  themselves  ;  the  major  rewards  diffuse  them- 
selves among  the  members  of  society  as  a  whole,  who  in  the 
end  absorb  the  total  jrain.     The  natural  rewards  of  invention 


48  POLITICAL  SCIENCE  QUARTERLY. 

are  the  most  economical  and  effective  of  all  possible  modes  of 
ensuring  the  advance  of  material  civilization.  They  come  in  a 
form  adapted  to  secure  a  maximum  result  with  a  minimum  of 
expense  to  the  beneficiaries.  They  are  not  stipends,  but  prizes  ; 
and  their  effect  is  to  enlist  the  services  of  scores  of  men  where 
only  one  can  receive  a  personal  return. 

Invention  may  give  to  an  establishment  a  temporary  monop- 
oly of  a  new  process  or  a  new  product,  and  raise  profit  for  the 
time  being  above  the  natural  level.  The  making  of  such  dis- 
coveries is  not  a  part  of  the  routine  work  of  a  manager.  It  does 
not  fall  within  the  scope  of  any  function  for  which  a  salary  is 
paid.  Some  Yankee  ingenuity,  some  power  of  adapting  me- 
chanical means  to  ends  is  indeed  required  in  a  successful  super- 
intendent. The  exercise  of  it  in  minor  ways  lies  within  the 
routine  of  his  business.  But  the  inventions  that  we  are  now 
considering  are  those  that  materially  change  that  routine.  If  a 
salaried  manager  makes  such  an  invention,  it  is  extra-ofificial 
work,  and  entitles  him  to  the  same  reward  that  would  accrue 
to  any  other  inventor. 

The  relations  between  the  makers  of  inventions  and  those 
who  introduce  them  are  an  interesting  subject  of  study;  and  so 
are  the  effects  which  the  introduction  of  them  has  on  establish- 
ments that  continue  to  use  the  older  methods.  It  is  not,  how- 
ever, desirable  to  obscure  our  main  propositions  by  too  many 
corollaries.  The  device  that  effects  an  important  economy 
must,  in  the  end,  force  itself  into  general  use,  and  thus  end 
the  advantage  which  prior  possession  gives  to  its  originators. 
Patents  expire,  and  secrets  become  known.  The  public  gets  a 
part  of  the  benefit  from  the  first  introduction  of  an  economical 
process,  and  gets  the  whole  benefit  in  the  end.  Competition 
restores  the  natural  rate  of  profit,  and  leaves,  as  a  permanent 
result,  an  increase  of  productive  power,  an  elevation  of  the  level 
of  human  life.  Patent  laws  are  an  evidence  that  the  personal 
rewards  to  be  gained  by  this  service  are  too  small,  rather  than 
too  large,  and  that  it  is  the  aim  of  the  state  to  prolong  the  fruits 
of  invention  beyond  the  limit  of  time  during  which,  by  natural 
law,  the  inventor  could  enjoy  them. 


PROFITS  UNDER  MODERN  CONDITIONS.  49 

If  the  theory  here  advanced  is  true,  an  inquiry  into  the  busi- 
ness profits  reaHzcd  in  this  country  during  the  past  few  years 
should  show  that  some  industries  are,  and  others  are  not,  ap- 
proaching the  condition  in  which  only  natural  profits  are 
afforded.  Statistics  that  group  several  branches  of  manufac- 
turing and  state  returns  in  the  aggregate  may  be  expected  to 
show  a  profit  somewhat  above  the  natural  rate ;  and  figures  for 
the  country  at  large  must  certainly  do  so.  The  general  rate  of 
profit  in  the  United  States  is  high,  not  only  because  of  gains 
realized  by  many  inventions,  but  because  of  returns  still  realized 
by  the  quick  exploitation  of  natural  resources.  Statistics  taken 
a  few  years  hence  would  probably  eliminate  much  of  this  latter 
variation.  The  profits  from  invention  would  remain,  and  the 
returns  of  any  considerable  group  of  industries  must  be  expected 
to  show  a  permanent  average  profit  somewhat  above  the  natural 
limit. 

On  the  other  hand,  the  returns  of  particular  branches  of 
industry  would  show,  in  many  cases,  a  close  approximation  to 
the  limit.  Figures  taken  in  a  single  case  would  show  the  stage 
of  development  that  one  industry  has  reached  ;  they  would  show 
whether  it  is  still  enjoying  a  residuum  of  originally  high  profit, 
or  whether  the  competitive  pressure  has  reduced  its  gains  to  the 
rate  that  can  be  permanently  maintained. 

It  will  be  seen  that  the  facts  that  we  need  in  order  to  fully 
verify  our  theory  are  not  at  present  to  be  had.  Fortunately, 
however,  the  facts  that  are  most  useful  are  those  that  relate, 
in  each  case,  to  one  specific  department  of  business  ;  and  here 
the  knowledge  which  each  employer  in  that  department  pos- 
sesses is  of  more  than  ordinary  scientific  value.  For  many 
purposes  aggregates  and  averages  taken  from  many  branches 
of  production  are  necessary ;  and  these  the  business  man  can- 
not furnish.  For  our  present  purpose  averages  are  misleading, 
and  the  returns  of  different  departments  taken  each  by  itself, 
give  the  testimony  that  we  desire.  It  is  not  difficult  to  obtain 
facts  of  this  kind  which  strikingly  illustrate  the  tendency  of 
recent  influences  to  crowd  profits  to  a  point  that  affords  noth- 
ing beyond  interest  and  the  wages  of  management. 


50  POLITICAL   SCIENCE   QUARTERLY. 

The  returns  of  the  textile  industries  of  New  England,  as 
shown  in  the  report  of  the  Boston  stock  market,  reveal  the  fact 
that  a  few  members  of  this  extensive  group  have,  during  the 
fifteen  years  preceding  1886,  enjoyed  a  certain  immunity  from 
the  full  effects  of  competitive  law.  The  returns  of  the  group 
as  a  whole  have,  during  that  interval,  been  strikingly  near  to 
the  point  of  natural  profit.  The  same  appears  to  be  true  of  the 
shoe  and  leather  industries.  The  iron  and  steel  manufactures 
and  the  numerous  branches  affiliated  with  them  compose  a  group 
so  extensive  that  its  average  profits  would  be  unavailable  for 
our  purpose.  Though  such  gains  as  those  which  patents  secured 
to  the  screw-making  industry  may  now  be  rare,  there  are  de- 
partments enough  in  which  competition  is  held  in  temporary 
abeyance  to  cause  considerable  deviation  from  the  theoretical 
standard.  Yet  within  this  general  group  may  be  found  numer- 
ous cases  in  which  the  law  is  verified  ;  and  the  same  is  true 
in  other  parts  of  the  manufacturing  field. 

Public  transportation  is  a  department  of  production  essentially 
peculiar.  The  local  traffic  of  railroads  enjoys  a  certain  im- 
munity from  the  full  effects  of  competition.  '  This  source  of 
variation  from  theoretical  standards  is  apparently  counter- 
balanced by  influences  of  an  opposite  character,  and  the  rail- 
roads of  the  United  States  show  an  approximation  to  the 
normal  rate  of  profits  that  is  even  closer  than  that  of  the  textile 
industries.  More  and  better  statistics  than  are  now  available 
are  certain  soon  to  be  collected  ;  and  there  is  no  risk  in  affirm- 
ing that  where  the  prescribed  conditions  exist,  the  normal  rate 
of  profits  will  be  realized.  Labor  of  every  sort  will  be  paid  for ; 
capital  will  be  rewarded  ;  but  there  will  be  no  bonus  for  any  one.^ 

We  are  living  in  a  half-developed  system,  and  in  the  law  of 
its  growth  may  discern  more  clearly  than  was  formerly  possible 
an  outline  of  the  form  that  it  will  ultimately  take.  That  law 
connects  the  rewards  of  business  life  with  services,  and  gauges 
them  in  amount  by  the  value  of  those  services.     It  gives  more 

1  I  am  indebted  to  the  Hon.  Joseph  II.  Walker,  of  Worcester,  Mass.,  for  statistics 
tending  to  show  that,  in  manufacturing  industries,  profits  in  excess  of  the  natural 
rate,  when  they  are  not  secured  by  inventions,  have  of  late  been  rapidly  disap- 
pearing. 


PROFITS  UNDER  MODERN  CONDITIONS.  5  I 

to  intellect  than  to  muscle,  and  more  to  character  than  to  either ; 
the  largest  stipends  that  it  offers  are  for  fidelity  to  trusts.  It 
checks  undue  discrimination  in  favor  of  mere  position,  and 
ensures  to  the  men  in  the  industrial  ranks  rates  of  pay  not 
too  far  below  those  enjoyed  by  their  leaders.  It  offers  special 
prizes  for  the  discovery  of  secrets  of  effective  work.  It  limits 
more  closely  than  statute  law  could  do  the  personal  benefits 
that  accrue  to  the  men  who  render  this  service,  so  that  when 
the  law  is  invoked  it  is  for  the  purpose  of  increasing  them.  By 
organization  and  discovery  it  constantly  places  humanity  upon 
new  vantage  ground  in  the  struggle  for  well-being.  Less  and 
less,  measured  in  effort,  is  becoming  the  cost  of  a  day's  enjoy- 
ments ;  greater  and  greater,  measured  in  enjoyments,  are  the 
returns  of  a  day's  labor.  In  cheapened  production,  which  is 
never  appreciated,  and  is  often  blindly  resisted,  lies,  according 
to  this  social  law,  the  chief  hope  for  modern  workers.  The 
leaders  and  discoverers  whose  labor  ensures  this  constant  gain 
find  their  rewards  limited  in  amount  and  in  time,  while  the 
wealth  that  they  diffuse  throughout  society  is,  in  both  direc- 
tions, limitless.  The  outline  of  the  coming  industrial  state  has 
the  shape  neither  of   despotism  nor   of  democracy ;   it  is  the 

outline  of  a  true  republic. 

John  B.  Clark. 


THE   NATURAL  RATE   OF   WAGES. 

IN  his  chapter  on  "  Popular  Remedies  for  Low  Wages " 
John  Stuart  Mill  described  a  certain  "  considerable  body  of 
existing  opinion  on  the  subject."  The  opinion  here  referred 
to  was  not  critical  opinion  merely,  it  was  also  opinion  as  an 
active  force.  Taking  form  in  legislation,  or,  less  coercively,  in 
moral  influence,  it  undertook  to  provide  that  the  workman 
should  have  "reasonable"  or  "sufficient"  wages.  That  is,  it 
was  exerted  to  maintain  wages  "  above  the  point  to  which  they 
would  be  brought  by  competition." 

As  in  Mr.  Mill's  time,  so  now,  there  are  two  sets  of  forces 
operating  with  reference  to  the  rate  of  wages.  One  set  is  com- 
posed of  the  forces  of  competition.  Their  action  is  automatic. 
Their  resultant  is  a  mechanical  equilibrium.  The  other  forces 
are  self-conscious  forms  of  human  feeling  and  opinion.  They 
set  up  a  standard  of  justice,  and  take  form  in  moral  judgments, 
appeals  to  reason,  the  policy  of  labor  organizations,  legislation, 
and  administration.  Whatever  their  efficacy  for  good  or  ill,  the 
self-conscious  forces  are  acquiring  an  increasing  prominence. 

In  regard  to  these  two  kinds  of  forces  that  make,  or  are 
supposed  to  make,  the  rate  of  wages,  we  may  discover  three 
different  views  among  economic  thinkers. 

By  economists  of  severely  deductive  habits  and  somewhat 
reactionary  tendencies,  the  self-conscious  forces  are  dismissed 
as  of  no  importance  except  as  a  disturbing  element.  They  are 
regarded  as  impotent  to  affect  the  rate  of  wages  in  the  long  run. 
Competition  is  held  to  be  the  only  agency  that  needs  to  be  con- 
sidered, because,  sooner  or  later,  the  rate  of  wages  will  be  made 
inexorably,  in  the  outworking  of  an  automatic  natural  process. 

Another  class  of  thinkers,  if  we  may  call  them  such,  deniers 
of  natural  law  in  the  social  world,  reach  the  opposite  conclusion. 
Competition  they  regard  as  a  kind  of  human  conduct  that  can 
be  checked  and  presently  made  end  of,  like  crime  or  intemper- 


THE  NATURAL  RATE  OF  WAGES.  53 

ance.  The  self-conscious  social  efforts  are  believed  to  be  quite 
sufficient,  if  fully  put  forth,  to  make  the  rate  of  wages,  so  far 
as  the  making  is  an  affair  of  distributing  a  certain  total  product 
among  the  parties  engaged  in  its  production. 

According  to  a  third  and  middle  view,  the  self-conscious 
forces  sustain  some  relation  to  the  physical  and  automatic  forces 
by  way  of  limitation  and  supplement.  Just  what  this  relation 
is,  is  a  fact  for  scientific  investigation  to  determine. 

In  science,  as  in  practical  affairs,  the  mean  hypothesis  is 
often  more  promising  than  either  extreme,  and  it  certainly  is  so 
in  the  highly  complex  sciences  of  social  phenomena.  Assuming 
then,  provisionally,  that  the  rate  of  wages  is  the  resultant  of 
competitive  and  moral  forces  acting  simultaneously,  the  true 
wages  problem,  as  it  presents  itself  to  the  economist  to-day, 
is  to  resolve  this  resultant,  and  ascertain  whether  it  lies  mainly 
within  the  projection  of  the  competitive,  or  mainly  within  the 
projection  of  the  moral  forces. 


We  may  conveniently  begin  the  study  of  this  problem  by 
examining  the  standards  of  ideal,  or  just,  wages,  that  are  set 
up,  and  attempting  to 'decide  what,  if  any,  is  their  common  and 
valid  content.  We  may  then  study  the  competitive  process  as 
it  goes  on  in  the  absence  of  consciously  imposed  restrictions 
and  ascertain  how  nearly  the  results  approximate  to  the  ideal. 
Lastly,  we  may  inquire  whether  the  application  of  the  self- 
conscious  forces  serves,  or  can  serve,  to  make  the  approximation 
more  complete. 

We  are  so  accustomed  to  make  a  sharp  distinction  between 
the  communistic  and  the  individualistic  ideals  of  society  that  it 
may  seem  absurd  to  affirm  that,  within  rather  broad  limits,  there 
is  no  absolute  contradiction  between  the  communistic  rule  : 
"From  each  according  to  his  abilities,  to  each  according  to  his 
needs,"  and  the  individualistic  rule  :  "  To  each  according  to  the 
value  of  his  work."  But  if  we  go  back  to  organic  principles  we 
shall  soon  discover  that,  as  a  general  and  average  fact,  the  one 


54  POLITICAL  SCIENCE  QUARTERLY. 

rule  cannot  mean  anything  else  than  the  other,  and  that,  so  far 
as  the  two  do  not  coincide  they  correct  each  other.  Taking 
the  phenomena  of  life  as  a  whole,  there  is,  and  must  be,  an 
equivalence  between  needs  and  work,  and  an  equivalence 
between  the  satisfaction  of  needs  and  the  existence  of  abilities 
to  work.  Needs  are,  in  general,  but  the  requirements  of  certain 
things  to  replace  the  tissue  consumed  in  physical  and  mental 
efforts,  or  to  build  up  and  develop  tissue  for  greater  future 
efforts.  These  efforts,  adjusted  to  useful  ends,  are  work,  and 
apart  from  work,  therefore,  there  are  no  genuine  needs.  Ex- 
cepting the  needs  of  childhood,  old  age  and  misfortune  —  excep- 
tions more  nominal  than  real  —  desires  or  requirements  for  other 
ends  than  those  of  useful  service  for  self  or  others  are  pseudo- 
needs,  illegitimate  in  economy  as  in  ethics.  The  satisfaction 
of  needs  is  not  limited,  however,  to  the  mere  restitution  of  an 
exact  equivalent  of  human  energy  already  expended.  To  some 
extent  it  anticipates  work  to  be  done.  Nature  makes  generous 
advances  to  her  children,  but  inexorably  enforces  payment.^ 
A  given  amount  of  food  contains  more  energy,  usually,  to  be 
set  free  through  its  consumption,  than  was  expended  in  obtain- 
ing it.  Consequently,  the  value  of  work  is  usually  a  little  more 
than  the  value  of  the  antecedent  work  from  which  it  was  evolved. 
To  these  advances  persistently  utilized  —  advances  converted 
into  abilities,  abilities  in  turn  put  forth  in  work  —  the  progress 
of  mankind  from  savagery  to  civilization  has  been  due. 

Occasional  and  individual  misadjustments  between  needs  and 
work  are  sure  to  occur,  because  social  changes  make  misadjust- 
ments of  every  possible  kind.  It  is  in  order  then  to  inquire 
how  the  misadjustmcnt  comes  about,  and  what  is  its  true  cor- 
rection. It  may  be  that  men  whose  needs  have  been  and  are 
fully  supplied  are  not  converting  their  supplies  into  an  equiva- 
lent of  useful  work,  or  it  may  be  that  men  who  are  willing  to 
work  and  have  the  will  to  develop  their  abilities  beyond  present 

*  Professor  Sumner's  assertion :  "  Whenever  nature  yields  to  man  an  atom  which 
he  has  not  earned,  or  advances  it  one  second  of  time  l)cfore  he  has  earned  it,  we  may 
all  turn  socialists  and  utopists "  (Collected  Essays  in  Political  and  Social  Science, 
p.  50),  contradicts  the  truth  of  both  biology  and  history. 


THE  NATURAL  RATE  OF  WAGES.  55 

limits  arc  inadequately  supplied  with  what  they  need.  Obviously 
the  remedy  in  the  one  case  is  to  bring  educational  disciplines 
to  bear ;  in  the  other  to  correct,  as  far  as  possible,  errors  in 
distribution.  The  correction  belongs  for  the  most  part  within 
the  sphere  of  moral  effort,  education,  and  philanthropy.  It 
belongs  to  economic  effort  so  far  as  the  value  of  the  laborer's 
work  falls  below  the  amount  that  will  both  recompense  him  for 
energy  expended,  and  afford  him  something  for  the  development 
of  his  potential  abilities  ;  for  this  is  its  natural  value,  the  value 
nature  commonly  gives  it.  The  rule  of  ideal  distribution  is,  to 
each  accordinir  to  the  full  natural  value  of  his  work. 


II. 

Such  being  the  ideal,  how  far  does  the  competitive  process 
tend  to  make  it  actual  .-•  What  is  the  rate  of  wages  in  the 
absence  of  self-conscious  agencies  acting  in  other  than  com- 
petitive ways } 

English  political  economy  has  always  more  or  less  distinctly 
affirmed  that  in  any  society  there  is  a  certain  natural  rate  of 
wages.  The  first  description  of  natural  wages  was  strikingly 
different  from  the  definition  that  soon  after  gained  acceptance. 
It  was  Adam  Smith's  saying,  —  the  first  sentence  in  his  discus- 
sion of  wages,  —  that  "the  produce  of  labor  constitutes  the 
natural  recompense  or  wages  of  labor,"  and  was  made  in  view 
of  "that  original  state  of  things"  when  there  was  neither  land- 
lord nor  master,  and  the  whole  produce  of  industry  belonged 
to  the  laborer.  The  truth,  so  fundamental  in  our  modern 
philosophy  of  wages,  that  in  a  later  industrial  state  also  — 
when  the  active  population  has  been  differentiated  into  vari- 
ous classes  of  employers  and  employed  —  the  wages  of  the 
laborer  are  still  approximately  equivalent  to  what  he  produces, 
is  not  worked  out  in  The  Wealth  of  Xaiions.  If  Adam 
Smith  ever  distinctly  perceived  that  the  employer's  profit  is 
value  created  by  his  own  services,  not  by  the  laborer's  exer- 
tions, the  idea  was  no  link  in  the  chain  of  thought  that  took 
shape  in   the  chapter  on  wages.     Consequently,  in  treating  of 


56  POLITICAL  SCIENCE  QUARTERLY. 

labor  as  conditioned  by  landlord  and  master,  his  thought  gravi- 
tates to  the  minimum  limit  to  which  wages  can  be  forced  by 
competition.  "  There  is,  however,"  he  says,  "  a  certain  rate 
below  which  it  seems  impossible  to  reduce,  for  any  considera- 
ble time,  the  ordinary  wages  even  of  the  lowest  species  of 
labor."  This  rate  is  the  wage  that  will  maintain  the  laborer, 
and  enable  him  to  rear  another  laborer  to  take  his  place  in  the 
next  generation.  If  the  wealth  of  a  country  were  stationary, 
the  competition  of  the  laborers  and  the  interest  of  the  masters 
would  soon  reduce  wages  to  this  lowest  rate  which  is  consistent 
with  common  humanity.  If  wealth  is  increasing,  and  so  long 
as  it  continues  to  increase,  wages  will  be  above  the  minimum. 
If  wealth  were  decreasing,  wages  would  fall  below  the  lowest 
humane  rate  until,  by  famine,  "the  number  of  inhabitants  in 
the  country  was  reduced  to  what  could  easily  be  maintained  by 
the  revenue  and  stock  which  remained  in  it."  ^ 

This  analysis  was  seized  upon  by  Ricardo,  who  condensed  it 
into  a  definition.  Giving  a  new,  and,  as  it  proved,  permanent 
meaning  to  the  term  "natural"  which  Adam  Smith  had  used 
in  a  sense  so  different,  Ricardo  defined  natural  wages  as  "that 
price  which  is  necessary  to  enable  the  laborers,  one  with  another, 
to  subsist  and  to  perpetuate  their  race  without  either  increase 
or  diminution." 2  To  its  author  this  definition  meant  a  great 
deal  more  than  the  words  explicitly  affirm.  Saying  nothing  of 
Ricardo's  analysis  of  minimum  wages  in  terms  of  food,  which 
we  need  not  follow,  it  is  plain  that  the  limit  below  which  he 
supposed  wages  could  not  permanently  fall  is  considerably  above 
tlie  minimum  described  by  Adam  Smith.  He  assumed  that  the 
laborer  was  master  of  the  minimum  rate  below  which  wages 
could  not  be  permanently  lowered.  "  It  is  not  to  be  under- 
stood," he  said,  "that  the  natural  price  of  labor,  estimated 
even  in  food  and  necessaries,  is  absolutely  fixed  and  constant. 
It  varies  at  different  times  in  the  same  country,  and  very  mate- 
rially differs  in  different  countries.  It  essentially  depends  on 
the  habits  and  customs  of  the  people."     It  is  safe  to  say  that 

1  The  Wealth  of  Nations,  chapter  viii. 

2  Principles  of  Political  Economy  and  Taxation,  chapter  v. 


THE  NATURAL  RATE  OF  WAGES.  57 

if  this  last  assumption  of  Ricardo's  had  been  warranted  by  the 
facts  of  the  actual  industrial  world,  English  political  economy 
would  have  escaped  the  wrath  of  humanitarians  and  the  name 
of  a  dismal  science.  But  when  John  Stuart  Mill  restated  and 
elaborated  the  body  of  doctrine  evolved  by  his  predecessors,  he 
was  not  long  in  proving  that  the  moral  minimum  of  wages  was 
a  myth.  Any  disadvantageous  change  in  the  circumstances  of 
laborers,  —  that  is,  any  reduction  of  actual  below  natural  wages, 
—  he  pointed  out,  "may  permanently  lower  the  standard  of  living 
of  the  class  in  case  their  previous  habits  in  respect  of  popula- 
tion prove  stronger  than  their  previous  habits  in  respect  of  com- 
fort. In  that  case  the  injury  done  will  be  permanent,  and  their 
deteriorated  condition  will  become  a  new  minimum  tending  to 
perpetuate  itself  as  the  more  ample  minimum  did  before ;  "^  and 
this  has  happened  and  does  happen  so  frequently  as  to  render 
all  propositions  ascribing  a  self-repairing  quality  to  the  calami- 
ties which  befall  the  laboring  classes,  practically  of  no  validity. 

III. 

Yet  it  does  not  follow  that  there  is  not  a  true  natural  rate  of 
wages,  well  above  the  limit  at  which  a  man  must  starve  or  beg. 
There  is  a  soul  of  truth  in  Ricardo's  idea,  and  it  happens  to  be 
the  only  part  of  the  doctrine  that  the  economist,  as  such,  is 
really  concerned  with.  Far  above  the  limit  of  mere  subsistence 
there  is  a  limit  below  which  the  permanent  reduction  of  wages 
is  uneconomical.  The  maximum  production  of  wealth  depends 
on  the  most  complete  and  perfect  division  of  labor,  and  the 
division  of  labor  depends  not  only  on  the  extent  of  the  market 
but  on  the  size  of  the  population.  The  extent  of  the  market 
itself  depends  on  the  size  of  the  producing  and  consuming  popu- 
lation, and  an  occupation  can  become  differentiated  from  allied 
occupations  and  developed  into  a  distinct  trade,  business,  or 
profession,  only  when  there  is  a  considerable  number  of  persons 
to  engage  in  it.  There  is,  therefore,  a  limit  below  which  the 
reduction  of  the  laboring  population  reduces  the  incomes  not 

^    Principles  of  Political  Economy,  book  ii,  chapter  xi. 


58  POLITICAL   SCIENCE  QUARTERLY. 

only  of  laborers  themselves  but  of  all  classes  in  the  community. 
The  farmer  cannot  develop  the  resources  of  his  land,  or  the 
manufacturer  increase  his  product.  The  reward  of  management 
is  curtailed  and  interest  reduced.  Again,  there  is  for  each 
laborer  a  maximum  efficiency  in  proportion  to  his  consumption. 
Up  to  a  certain  point  the  more  real  wages  put  into  him  the 
more  useful  service  can  be  gotten  out  of  him.  To  quote  once 
more  from  Adam  Smith,  the  industrial  experience  of  a  century 
has  been  but  cumulative  proof  of  his  saying :  "  A  plentiful  sub- 
sistence increases  the  bodily  strength  of  the  laborer,  and  the 
comfortable  hope  of  bettering  his  condition  and  of  ending  his 
days  in  ease  and  plenty  animates  him  to  exert  that  strength  to 
the  utmost."^  As  statistical  science  and  methods  improve,  it 
should  be  possible  to  ascertain  the  economical  rate  of  wages 
for  any  given  occupation  at  any  given  time,  and  with  a  fair 
approximation  to  accuracy,  by  means  of  statistical  averages 
drawn  from  selected  results.  These  would  include  statistics  of 
the  cost  of  labor  of  the  same  nationality,  employed  under  sub- 
stantially similar  conditions  except  differences  of  real  wages. 

Now  this  economical  rate  is  none  other  than  the  ethical  rate. 
To  give  the  laborer  the  wage  that  calls  out  his  full  efficiency 
and  affords  him  a  comfortable  hope  for  old  age,  is  to  give  him 
no  less  than  that  sum  which  is  sufficient  to  develop  his  potential 
abilities.  In  communities  accustomed  to  change  and  progress, 
the  actual  rate  of  wages  must  equal  this  ethical  and  economical 
rate,  or  fall  very  much  below  it.  Where  the  ideas  and  aspira- 
tions of  the  successful  are  communicated  to  all  classes  the 
laborer  can  never  remain  in  an  equilibrium  of  contentment. 
The  stimulus  and  tone  of  his  life  is  the  prospect  of  doing  better. 
Remove  that  stimulus  and  he  does  not  simply  remain  a  station- 
ary economic  quantity,  he  deteriorates  from  that  moment.  His 
efficiency  is  impaired,  he  adds  less  and  less  to  the  world's  sum 
total  of  wealth.  Losing  the  ambition  to  do  as  well  as  he  can, 
he  loses  also  the  ambition  to  live  as  well  as  he  can,  to  make  the 
most  of  what  he  has.  He  falls  into  unsanitary  habits.  His 
vitality  and  that  of  his  children  is  impaired,  and,  while  he  may 

^  The  Wealth  of  Nations,  chapter  viii. 


THE  NATURAL  RATE  OF  WAGES.  59 

have  as  many  children  as  he  would  have  if  living  in  wholesome 
prosperity,  not  as  many  of  them  will  survive  to  maturity.  Both 
in  efficiency  and  in  numbers  the  labor  force  is  diminished,  and 
the  total  production  of  society  is  lessened.  Consequently,  in  a 
community  advancing  in  wealth  and  refinement,  that  cannot  be 
an  economical  rate  of  wages  which  is  insufficient  to  enable  the 
workingman  to  share  in  the  general  expansion  of  life. 

Giving  to  the  laborer  the  full  natural  value  of  his  work,  the 
economical  rate  of  wages  is  no  less  than  the  produce  of  his 
labor.  The  economical  rate,  moreover,  is  the  rate  to  which 
wages  actually  would  conform  if  competition  were  governed 
only  by  the  expectation  of  gain,  and  the  losses  of  excessive 
competition  could  not  be  shifted  by  the  competitors  upon  others. 
Competition  carried  to  the  extent  of  keeping  wages  as  low  as 
this  rate  is  beneficial  to  all.  It  forces  men  to  make  the  most 
of  their  opportunities,  it  sharpens  thought  and  disciplines  char- 
acter, and  calls  the  creative  powers  into  fullest  action.  Carried 
the  least  degree  farther,  competition  merely  deadens  and 
destroys,  and  the  majority  of  men  do  not  habitually  carry 
competition  to  destructive  lengths  when  acting  freely  by  the 
impulse  of  natural  motives.  The  economic  limit  of  competition 
is  its  natural  limit  —  not  always  its  actual  limit — and  the  rate 
of  wages  made  by  competition  restricted  within  this  limit  is  a 
natural  rate. 

Therefore,  in  the  fullest  sense,  the  economical  rate  is  at  once 
the  true  natural  and  the  true  ethical  rate  of  wages.  Stripped 
of  fallacy  and  rightly  developed,  the  Ricardian  doctrine  of 
natural  wages  is  identical  with  the  earlier  affirmation  of  Adam 
Smith.  The  natural  remuneration  of  the  laborer  is  the  produce 
of  his  labor,  and  in  an  improving  society  this  produce  is  not  less 
than  the  "reasonable"  and  "sufficient"  wages  which  humani- 
tarian feeling  demands. 

IV. 

Let  us  now  inquire  to  what  extent  the  actual  rate  of  wages, 
so  far  as  competition  determines  it,  tends  to  conform  to  the 
natural  rate. 


6o  POLITICAL  SCIENCE  QUARTERLY. 

The  wages-fund  doctrine  has  been  finally  overthrown,  and  it 
has  been  abundantly  demonstrated  that  the  actual  rate  of  wages 
is  made  by  the  productiveness  of  industry ;  but  the  proposition 
has  not  been  reduced  to  perfect  definiteness.  That  is  to  say, 
it  is  no  longer  disputed  that  wages  are  more  when  product  is 
more  and  less  when  product  is  less,  but  there  is  still  dispute 
whether  increasing  production  tends  to  benefit  chiefly  the 
employer  or  chiefly  the  laborer.  The  decisive  answer  to  this 
question  will  be  given  some  day  by  statistics.  Meanwhile  we 
can  satisfy  ourselves  on  two  important  points. 

The  formula  of  Cobden  that  wages  rise  when  two  bosses  are 
after  one  man  and  fall  when  two  men  are  after  one  boss,  means 
that  every  increase  in  the  number  of  employers  who  can  make 
a  sufficient  profit  from  their  business  to  maintain  themselves  as 
employers,  acts  favorably  on  the  rate  of  wages.  And  this  is 
true,  notwithstanding  the  fact  that  consolidations  of  productive 
undertakings,  concentrating  them  in  the  hands  of  the  most 
competent  men,  are  attended  with  economy  of  production.  So 
long  as  new  employers  can  find  a  place  in  any  industry,  and 
profitably  maintain  themselves  in  it,  the  benefits  arising  from 
concentration  have  not  yet  been  distributed  in  wages  and 
reduced  prices  of  utilities.  The  profits  of  the  employers 
hitherto  in  the  field  have  been  abnormally  large.  It  is  not  the 
intrusion  of  poorer  employers  into  the  field  that  increases  the 
profits  of  abler  employers,  any  more  than  it  is  the  actual  resort 
to  poorer  land  that  increases  the  rent  of  better  land.  It  is  the 
increasing  value  of  the  produce  of  the  best  land,  due  to  its 
failure  to  supply  an  increasing  demand  upon  it,  that  makes  the 
profitable  cultivation  of  poorer  land  possible  and  affords  rent  to 
the  best.  The  actual  cultivation  of  the  worst  land  that  can  be 
cultivated  with  profit  establishes  a  limit  beyond  which  the  value 
of  the  produce  of  the  best  land  cannot  rise.  But  for  the  prod- 
uce of  poor  land  the  owners  of  fertile  land  could  obtain  famine 
prices.^  So  of  employers.  If  there  is  any  condition  necessi- 
tating a  resort  to  poorer  employers  it  is  the  failure  of  the  best 

'  Malthus  understood,  or  at  least  stated,  the  cause  of  rent  more  accurately  than 
Ricardo.     Cf.   James  lionar,  Malthus  and  his  Work. 


I 


THE  NATURAL  RATE  OF  WAGES.  6 1 

employers  to  supply  the  demand  for  employer  functions.  The 
number  of  men  of  superlative  business  genius  is  small,  and  the 
powers  of  the  ablest  men  are  not  unlimited.  If  there  were  no 
resort  to  a  commoner  grade  of  talent  the  value  of  the  employer 
function  would  rise  above  any  assignable  price.  So  far  from 
deducting  in  any  way  from  the  laborer's  real  wages,  the  multi- 
plication of  employers  who  can  sustain  themselves  above  bank- 
ruptcy reduces  the  prices  of  goods  and  increases  the  wages  of 
labor. 

Does  a  condition  of  improving  industry  tend  to  multiply 
employers .''  The  true  answer  to  this  question  is  that  the  num- 
ber of  employers  tends  to  multiply  just  as  far  as  the  more 
gifted  employers,  or  combinations  of  gifted  employers,  fail  to 
discharge  the  employer  function  with  decreasing  cost  to  the 
community,  thereby  leaving  for  real  wages  an  increasing  portion 
of  the  total  product  of  industry.  This  law  is  absolute.  That 
combinations  economize  production  we  know.  It  is  one  of  the 
most  striking  phenomena  of  modern  industrial  life.  It  is  as  if 
the  owners  of  superior  lands  should  discover  some  means  by 
which  increasing  investments  of  capital  in  agriculture  should 
yield  increasing,  instead  of  diminishing,  returns.  They  could 
then  drive  the  cultivators  of  the  poorer  lands  out  of  the  market 
if  they  chose,  but  only  by  dividing  their  increasing  gains  with 
consumers.  Should  they  attempt  to  retain  all,  the  humbler  cul- 
tivators would  again  meet  them  in  the  market.  It  is  the  same 
with  employers.  Centralization  of  the  employer  function  and 
the  extinction  of  the  smaller  employers  is  possible  only  by  con- 
veying to  the  laborer  a  larger  share  of  product  than  he  previ- 
ously enjoyed.  There  is,  indeed,  a  limit  in  every  industry 
beyond  which  the  intrusion  of  new  competitors  will  ensure  the 
bankruptcy  of  some  ;  and  when  that  limit  is  reached  the 
stronger  survivors  endeavor,  by  a  judicious  policy  as  to  prices, 
to  hold  the  field.  But  there  remains  the  limitless  domain  of 
new  utilities,  and  the  specialization  of  utilities  depends  not  only 
on  that  geographical  extension  of  the  market  wiiich  Adam 
Smith  described,  but  even  more,  under  modern  conditions,  on 
the  productiveness  of  industry,  the  greater  or  lesser  incomes  of 


62  POLITICAL  SCIENCE  QUARTERLY. 

the  people.  When  a  man's  income  is  increasing  he  does  not 
increase  all  his  expenses  in  proportion  ;  he  adds  some  new  ones 
outright,  purchases  some  utilities  that  he  did  not  enjoy  before. 
When  his  income  is  decreasing  he  lops  off  some  at  a  stroke. 

From  all  this  it  would  appear  that  in  communities  enjoying 
increasing  prosperity  the  actual  rate  of  wages  must  tend  con- 
stantly to  conform  to  that  true  natural  rate  which  is  at  once 
the  economical  and  the  ethical  rate.  That  this  is,  indeed,  the 
real  tendency  in  the  industrial  nations  at  the  present  time, 
there  is  much  reason  to  believe ;  but  there  are,  unfortunately, 
many  exceptions  extending  over  large  areas  of  population  and 
through  long  intervals  of  time.  To  conform  to  the  natural  rate 
would  be  the  real  tendency  everywhere  and  always,  if  competi- 
tion were  always  uniform  and  normal.  But  in  the  actual  indus- 
trial world  competition  is  never  uniform,  and  because  not 
uniform  it  is  often  carried  to  ruinous  excess. 

V. 

I  have  elsewhere  shown  that  the  competitive  process,  judged 
by  economic  or  ethical  standards,  is  inherently  defective,^  and 
this  because,  like  all  natural  processes,  it  assumes  a  rhythmical 
form.  "  Competition  begins  only  after  gains  in  excess  of  nor- 
mal profits  have  accrued  to  employing  producers.  As  a  conse- 
quence of  this  fact,  when  competition  does  begin  it  goes  to 
excess."  When,  passing  the  normal  limit,  competition  assumes 
that  terrible  intensity  that  presages  business  ruin,  the  employer 
is  driven  to  every  expedient  to  save  some  part  of  his  narrowing 
margin  of  profit.  The  readiest  expedient,  the  most  available 
for  the  moment,  though  costliest  in  the  end,  is  the  exploitation 
of  wages.  In  a  mild  way  this  is  done  by  tacitly  or  openly 
restricting  competition  in  the  purchase  of  labor.  Whatever 
brings  additional  employers  into  productive  enterprise  and  in- 
tensifies competition  in  the  sale  of  products  will  naturally  in- 
tensify competition  in  the  purchase  of  labor  ;  but  we  must  be 
careful  not  to  confound  the  two  processes.     To  some  cxtc^^t  it 

*  The  Theory  of  Profit  Sharing,  Quarterly  Jctirual  of  Economics,  April,  1887. 


THE  NATURAL  RATE  OF  WAGES.  d-iy 

is  easily  possible  for  employers  to  separate  them  in  their  indus- 
trial practice,  thereby  adding  to  their  profits  a  sum  that  would 
otherwise  be  added  to  wages.  In  its  worst  and  most  brutal 
form  the  exploitation  of  wages  becomes  a  positive  extortion 
from  working  men  and  women  who  have  been  reduced  by  mis- 
fortune to  such  straits  that  all  power  of  resistance  is  gone.  It 
becomes  the  "sweating"  system  of  the  clothing  trades,  the 
"plucking"  system  of  the  coal  districts.  Between  these  ex- 
tremes are  all  those  gradations  that  substitute  the  labor  of 
women  for  the  labor  of  men,  the  labor  of  children  for  the  labor 
of  women,  and  replace  the  native  laborer  with  a  foreign  compet- 
itor of  a  lower  grade  of  life.  All  these  exploitations,  reducing 
wages  below  the  true  economical  rate,  react  disastrously  on 
production,  in  time,  and  are  contrary  to  the  interests  of  em- 
ployers as  a  class  ;  but  they  profit  for  a  while,  and  may  continu- 
ously profit  the  individual  employer  who  can  shift  upon  society 
or  his  competitors  the  losses  that  his  practice  creates.  He 
divides  his  ill-gotten  ga.ins  with  the  consumer,  and  thereby, 
commanding  the  market,  compels  worthier  competitors  to 
adopt  his  methods. 

Now  to  these  deplorable  results  of  ill-regulated  competition 
there  is  no  automatic  correction,  springing  from  motives  of 
individual  self-interest,  that  meets  the  case.  The  wide-spread 
belief  that,  if  the  exploitation  of  wages  is  carried  so  far  as  actu- 
ally to  enrich  the  employer,  the  sum  so  gained,  if  converted  into 
capital,  will  return  to  labor,  is  still  shared  by  many  respectable 
economists.  It  is  true  to  the  extent  that  increasing  capital 
does  act  favorably  on  wages.  In  overthrowing  the  wages-fund 
doctrine  economists  have  somewhat  lost  sight  of  the  real  func- 
tion performed  by  capital  in  employing  labor.  The  owners  of 
accumulating  capital,  casting  about  for  productive  investments, 
select,  according  to  their  best  judgment,  those  that  promise  to 
yield  the  best  returns.  Labor  for  such  new  enterprises  must  be 
drawn,  by  the  offer  of  increased  wages,  from  other  employ- 
ments—  to  some  extent  even  when  there  is  a  large  body  of 
unemployed  workmen,  since  the  unemployed  are  always  the 
relatively  inefficient.     Even  the  replacement  of  old  capital  gives 


64  POLITICAL  SCIENCE  QUARTERLY. 

rise  to  this  process  of  selection  among  actual  and  possible  enter- 
prises with  reference  to  their  anticipated  profitableness,  and  the 
consequent  drafting  of  labor  from  the  less  profitable  to  the  more 
profitable  employments.  The  accumulation  of  new  capital 
amplifies  and  accelerates  it.  Hence  the  ratio  of  capital  to  popu- 
lation, though  having  in  its  static  aspect  no  such  relation  to 
wages  as  the  old  doctrines  ascribed  to  it,  has  yet  a  dynamic 
relation  that  is  definite  and  important.  But  when  the  capital 
has  been  wrung  from  labor,  the  original  wrong  is  never  righted. 
The  capital  has  become  the  property  of  the  employer,  and 
has  increased  his  power.  The  way  in  which  it  has  been 
obtained  has  cultivated  the  disposition  to  acquire  power  in 
that  way  by  continuing  to  exploit  wages,  even  when  indus- 
trial conditions  no  longer  afford  an  excuse.  The  loss  sus- 
tained by  the  laborer  may  never  be  repaired,  for  degradations 
of  men  and  women  are  converted  into  organic  changes.  A 
lower  type  of  life  is  the  result,  and  ultimately  the  reaction 
is  completed  in  a  positive  impairment  of  the  productive  force 
of  the  community. 

Neither  are  the  evil  results  of  unequal  competition  corrected 
by  efforts  springing  from  altruistic  motives,  so  long  as  these  are 
not  reinforced  by  associated  action.  The  ultimate  cure  for 
industrial  evils  is,  indeed,  in  the  growth  of  altruistic  feeling. 
Employers  must  cease  to  exploit  wages,  either  to  avoid  loss 
or  to  increase  their  profit  and  power.  They  and  others  must 
endeavor,  by  personal  help  and  encouragement,  to  counteract 
the  tendency  to  degradation  in  the  unfortunate  and  discouraged. 
But  that  these  efforts  on  the  part  of  those  who  have  the  dispo- 
sition to  make  them  may  avail,  a  restraint  must  be  put  on  those 
who  have  no  such  disposition.  Unselfish  men,  acting  as  indi- 
viduals, without  reference  to  each  other,  would  be  crowded  out 
in  the  struggle  for  survival.  That  ninety-nine  fair  employers 
may  have  a  chance,  there  must  be  some  restraint  upon  the  hun- 
dredth unfair  one  ;  and  that  restraint  can  be  effectively  organ- 
ized only  by  the  interests  injuriously  affected.  It  must  be  their 
united  resistance  and  co-operation. 


THE  NATURAL  RATE  OF  WAGES.  65 

VI. 

So  \vc  arc  brought,  at  last,  to  consider  the  action  of  those 

self-conscious  forms  of  feeling  and  opinion  which  undertake  to 

■govern  the  competitive  process  by  such  means  as  the  policy  of 

labor  organizations  and  legislation.    What  can  they  accomplish  ? 

It  requires  neither  argument  nor  marshalling  of  facts  to  prove 
that  by  no  means  whatever  can  employers  be  forced  to  surren- 
der from  their  gross  profits,  for  addition  to  the  wages  of  their 
employees,  any  part  of  the  sum  that  constitutes  the  normal 
reward  of  the  employer  function.  Any  attempt,  temporarily 
successful,  to  secure  more,  would  simply  drive  employers  out 
of  business  and  throw  labor  out  of  employment.  But  when 
competition  among  the  undertakers  of  enterprise  is  carried  to 
its  full  normal  limits  there  will  be  no  ulterior  profit  in  excess 
of  such  reward  of  the  ctitrcprcnetir  function  as  will  maintain 
that  function  unimpaired.  With  capital  accumulating  for  in- 
vestment, the  competition  of  producers  as  sellers  of  their  pro- 
ducts is  sure  to  reach  its  full  normal  limits.  The  only  sums, 
then,  that  can  be  added  to  wages  by  any  means  whatever  are: 
First,  the  sum  labor  is  in  danger  of  losing,  either  (i)  through  the 
failure  of  employers  to  compete  as  freely  as  purchasers  of  labor 
as  they  compete  as  sellers  of  products,  or  (2)  by  that  merciless 
competition  which  takes  advantage  of  the  laborer's  ignorance 
or  weakness  to  rob  him  and  divides  the  plunder  between  the 
employing  producer  and  the  buyer  of  goods.  Secondly,  the 
sum  that  might  be  produced  by  calling  into  action  any  potential 
manhood  and  ability  of  the  laborer  that  actual  competition  fails 
to  develop.     Can  as  much  as  this  be  accomplished } 

The  power  of  the  labor  organization  is  the  strike,  actual  or  in 
reserve,  and  back  of  the  strike  the  ability  of  the  organization  to 
hold  together.  Unless  there  is  some  ulterior  motive  for  permit- 
ting the  strike,  the  employer  can  better  afford  to  yield  to  the 
demand  of  labor  any  sum  less  than  the  amount  the  strike  will 
cost  him  and  not  exceeding  the  aggregate  of  the  sums  above  de- 
scribed as  possible  additions  to  wages.  Let  us  designate  this 
aggregate  by  d  and  the  cost  of  the  strike  by  c.     Included  in  the 


66  POLITICAL  SCIENCE  QUARTERLY. 

sum  ^will  be  a  sum  d'  which,  if  d  does  not  go  to  labor,  cannot 
go  to  the  employer.  It  is  the  sum  wrested  from  labor  by  the 
illegitimate  forms  of  competition  and  given  to  the  consumer  in 
an  abnormal  reduction  of  price,  as  for  example  in  the  case  of 
the  white  underclothing  made  by  sewing  women.  All  that  an 
employer  can  add  to  his  own  profit  at  the  expense  of  labor  is 
d—d'.  If,  now,  the  demand  of  labor  over  which  a  strike  is 
threatened  is  for  a  sum  exceeding  d,  the  employer  has  no  alter- 
native but  to  resist  until  labor  is  starved  into  submission  or  the 
business  is  indefinitely  suspended,  since  he  may  as  well  quit 
business  entirely  and  accept  a  salary  as  to  permanently  surren- 
der a  part  of  the  normal  and  equitable  reward  of  his  own  ser- 
vices. Again,  if  there  is  a  good  prospect  that  labor  can  be 
brought  to  surrender  before  the  cost  of  the  strike  c,  plus  d'  (the 
sum  conveyed  by  competition  to  the  consumer)  amounts  to  the 
sum  d,  it  is  the  employer's  policy  to  resist  it  for  the  sake  of  sav- 
ing as  an  addition  to  his  profit  the  remainder,  d—  (c  -\-  d').  If, 
on  the  other  hand,  labor  can  hold  out  until  c—d'  equals  d,  the 
employer  can  better  afford  to  surrender  at  once  the  entire  sum 
d,  unless  there  is  an  ulterior  object  to  be  gained  by  resistance. 

Such  an  ulterior  object,  if  it  could  be  achieved,  would  be  the 
discouragement  of  organized  and  concerted  action  by  labor,  and 
it  could  be  achieved  if  the  sum  to  be  lost  by  labor  in  maintaining 
its  organization  was  greater  than  the  sum  to  be  lost  by  permit- 
ting its  disintegration  or  if  the  organization  of  labor  limited  and 
weakened  itself  by  mistakes  of  policy.  On  the  contrary,  if  labor 
must  lose  as  much  by  disintegration  as  it  can  possibly  lose  in 
defending  its  organization,  and  if  the  amount  that  the  employer 
can  add  to  his  own  profits  by  breaking  down  the  organization 
is  small  at  the  best  in  proportion  to  the  sum  that  labor  can  gain 
by  concerted  action,  employers  will  not  follow  a  policy  of  war- 
fare against  labor  organizations. 

And  these,  it  is  easy  to  see,  arc  the  actual  facts.  The  sura 
that  labor  has  to  gain  is  the  sum  d.  The  utmost  that  the  em- 
ployer can  add  to  his  profit  is  d—d\  the  sum  withheld  from 
labor  by  unequal  and  illegitimate  competition,  less  the  sum  con- 
veyed by  illegitimate  competition  to  the  consumer.     And  the 


THE  NATURAL  RATE  OF  WAGES.  67 

loss  by  labor  of  the  sum  d  means,  as  wc  have  seen,  the  progres- 
sive degradation  of  labor.  If  the  loss  is  inevitable,  workmen 
may  as  well  lose  by  strikes  as  by  competition  with  each  other. 
They  can  afford  to  sacrifice  in  defence  of  organization  all  that 
it  is  possible  for  them  to  lose. 

By  organization,  therefore,  labor  can  secure  the  whole  sum  d 
Avhen  abnormal  competition  tends  to  convey  it  to  employers  and 
consumers,  and  the  organization  can  be  broken  only  by  its  own 
defects  of  constitution  or  mistakes  of  policy.  The  principles 
governing  the  coherence  of  the  labor  organization  are  the  same 
as  those  governing  the  coherence  of  combinations  of  producers. 
It  is  essentially  defensive,  not  aggressive.  It  is  more  or  less 
coherent  as  it  is  more  or  less  homogeneous  in  composition.  It 
can  only  correct  the  results  of  imperfect  competition  and  bring 
illegitimate  competition  within  normal  limits.  If  it  attempts  to 
secure  more  than  the  sum  d,  it  curtails  employment  and  sets  up 
economic  reactions  against  the  whole  wages  class.  And  it 
must  allow  to  its  members  the  best  wages  they  could  severally 
make  by  their  individual  competition.  Men  will  join  and  re- 
main in  labor  organizations  only  if  they  can  thereby  secure 
better  wages  than  they  can  secure  by  individual  efforts.  They 
will  secede  if  their  superior  abilities  are  refused  reward,  or  if 
mistaken  policy  reduces  wages  below  the  sum  they  could  com- 
mand as  individuals  and  still  be  above  the  minimum  at  which 
resort  to  charity  begins.  The  Knights  of  Labor  in  their  earlier 
organization  violated  the  law  of  homogeneity.  In  reorganizing 
on  trade  lines  they  are  attempting  to  conform  to  it.  Trade 
unions  have  traditionally  made  the  mistake  of  refusing  to  allow  to 
the  best  workmen  the  wages  they  could  command  as  individuals. 

We  need  not  linger  to  prove  that  arbitration  and  legislation, 
so  far  as  they  have  to  do  with  wages,  are  subject  to  the  same 
general  limitations  as  the  policy  of  labor  organizations.  They 
have  to  do  only  with  securing  to  labor  the  sum  d.  They  can 
add  to  wages  only  the  sum  that  would  be  added  by  competition 
in  the  purchase  of  labor  as  perfect  as  the  competition  in  selling 
products,  and  by  restriction  of  competition  in  selling  products 
to  normal  limits. 


68  POLITICAL  SCIENCE  QUARTERLY. 

VII. 

Must  we  not  therefore  conclude  that  the  rate  of  wages  is 
made  mainly  by  the  competitive  forces,  and  that  the  moral  forces, 
acting  through  organization  and  public  opinion,  are  powerful  to 
correct  the  distributive  errors  caused  by  the  inherent  defective- 
ness of  the  competitive  process,  but  that,  beyond  such  corrective 
work,  they  are  unavailing  ?  Apparently  we  must,  if  we  consider 
the  direct  process  only.  But  beyond  the  direct,  immediate  process, 
is  an  indirect  process  in  which  moral  forces  have  a  larger  sweep. 
We  have  seen  that  on  the  productiveness  of  industry  depends 
not  only  the  absolute  amount  of  the  laborer's  remuneration,  but 
also  its  relative  amount,  the  proportion  it  bears  to  the  whole 
product.  And  that  the  productiveness  of  industry  is  condi- 
tioned by  the  moral  quality  of  the  people  is  no  new  truth  of 
either  political  economy  or  practical  wisdom.  Whatever  per- 
sonal or  associated  effort,  education  or  legislation,  can  do  to 
develop  the  physical  vigor  and  moral  powers  of  vvorkingmen, 
will  amplify  the  product  of  their  labor  and  increase  their  in- 
comes. It  will  narrow  somewhat  the  gulf  between  the  abilities 
and  incomes  of  the  few  and  those  of  the  many.  The  function 
of  the  man  of  business  is  essentially  that  of  co-ordinating  the 
factors  and  processes  of  the  economic  world — labor,  capital, 
invention,  and  superintendence  in  the  factory,  supply  and 
demand  in  the  market.  Throughout  organic  nature,  and  no 
less  in  human  society,  the  co-ordinating  function  is  useful  and 
costly  compared  with  the  mere  expenditure  of  energy  in  direct 
and  simple  ways.  If  the  many  are  to  share  in  the  great  rewards 
now  enjoyed  by  the  few,  they  must  become  competent  to  assist 
in  discharging  the  functions  now  discharged  by  the  few.  This 
thought  suggests  another,  that,  perhaps  in  a  much  more  direct 
way  than  has  been  supposed,  the  more  serious  economic  dis- 
turbances of  modern  times,  those  industrial  depressions  that 
follow  the  enormous  displacements  of  cnpital  and  labor  which 
invention  and  discovery  are  continually  making,  are  aggravated 
or  mitigated  by  the  intellectual  and  moral  qualities  of  the  people. 
For  on  what  else  docs  the  utilization  of  such  changes  with  least 


THE  NATURAL  RATE  OF  WAGES.  69 

loss  depend,  than  on  the  ability  of  the  people  to  make  quickly 
and  easily  the  necessary  readjustments?  This  is  a  large  and 
perhaps  a  fruitful  subject,  on  which  we  cannot  enter  at  this  time. 
It  is  sufficient  to  know  that,  if  not  in  the  way  contemplated  by 
Ricardo,  yet  in  a  way  immeasurably  more  important,  the  rate 
of  wages  depends  on  "the  habits  and  customs  of  the  people": 
above  all  on  the  habit  of  "  acting  upon  each  other  not  as  the 
forces  of  inorganic  nature  work,  in  blind  impact  and  resistance, 
but  rather  as  the  forces  of  organic  life,  assimilatively — each 
finding  his  ends  in  the  ends  of  the  others,  and  all  working 
in  and  through  the  others  for  the  development  of  one  organic 
social  whole,  in  which  each  individual  is  at  once  the  means  and 
the  end  of  all  the  rest."  ^  The  growth  of  this  habit  will  contin- 
ually raise  the  natural  rate  of  wages  —  the  rate  below  which 
reductions  are  wasteful  and  immoral.  The  competition  that 
forces  actual  wages  down  to  that  natural  rate  —  to  the  rate,  that 
is,  that  rewards  a  man  according  to  the  use  he  makes  of  the 
powers  with  which  he  is  endowed,  affording  him  the  means  to 
develop  them,  but  not  to  idle  them  away  —  also  tends,  no  less 
certainly,  to  raise  the  natural  rate,  for  it  stimulates  effort  and 
quickens  thought.  It  is  the  chief  cause  of  intellectual  progress 
and  systematic  endeavor.  Legislation,  arbitration  and  efforts  of 
organizations,  so  far  as  they  correct  the  tendency  of  competition 
to  reduce  actual  below  natural  wages,  play  their  part  also  in 
raising  the  natural  rate.  Carried  the  least  degree  farther,  they 
but  interfere  with  the  normal  action  of  other  forces,  and  thereby 
retard  progress. 

Franklin  H.  Giddings. 

^  Daniel  Greenlcaf  Thompson,  The  Problem  of  Evil,  p.  2S0. 


UC  SOUTHFRN  RFGIONAL  I IBRARY  FACILITY 

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AA    001  122  198    3 


